Pitfalls of Positive Thinking on Finances

Positive thinking, usually tied to success and well-being, has been linked to potential drawbacks, particularly in the realm of financial decision-making, as highlighted by a study, published in the journal Personality and Social Psychology Bulletin ().

The researchers from the UK-based University of Bath showed that excessive optimism is associated with lower cognitive skills such as verbal fluency, fluid reasoning, numerical reasoning, and memory.

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‘While positive thinking is associated with success and well-being, a recent study warns that it may result in poor financial choices with significant consequences. #optimism, #wellbeing, #positivethinking ’

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Whereas those high in cognitive ability tend to be both more realistic and pessimistic in their expectations about the future.

“Forecasting the future with accuracy is difficult and for that reason, we might expect those with low cognitive ability to make more errors in judgments, both pessimistic and optimistic. But the results are clear: low cognitive ability leads to more self-flattering biases - people essentially deluding themselves to a degree,” said Dr Chris Dawson of the University’s School of Management.

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"Plans based on overly optimistic beliefs make for poor decisions and are bound to deliver worse outcomes than would realistic beliefs,” he added.

According to the researchers, decisions on major financial issues such as employment, investments or savings, and any choice involving risk and uncertainty, were particularly prone to this effect and posed serious implications for individuals.

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The study took data from a UK survey of over 36,000 households looked at people’s expectations of their financial well-being and compared them with their actual financial outcomes.

The study found that those highest in cognitive ability experienced a 22 percent increase in the probability of “realism” and a 35 percent decrease in the probability of “extreme optimism”.

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“Unrealistic optimism is one of the most pervasive human traits and research has shown people consistently underestimate the negative and accentuate the positive. The concept of ‘positive thinking’ is almost unquestioningly embedded in our culture -- and it would be healthy to revisit that belief,” Dawson said.

Reference:

Being overly optimistic may lead to poor decision-making: Study - (https://ians.in/detail/being-overly-optimistic-may-lead-to-poor-decision-making-study--20231231143305)

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Source-IANS