Looking on the (B)right side of life: cognitive ability and miscalibrated financial expectations

Publication type

Journal Article

Author

Publication date

November 10, 2023

Summary:

It is a puzzle why humans tend toward unrealistic optimism, as it can lead to excessively risky behavior and a failure to take precautionary action. Using data from a large nationally representative U.K. sample (N = 36,312), our claim is that optimism bias is partly a consequence of low cognition—as measured by a broad range of cognitive skills, including memory, verbal fluency, fluid reasoning and numerical reasoning. We operationalize unrealistic optimism as the difference between a person’s financial expectation and the financial realization that follows, measured annually over a decade. All else being equal, those highest on cognitive ability experience a 22% (53.2%) increase in the probability of realism (pessimism) and a 34.8% reduction in optimism compared with those lowest on cognitive ability. This suggests that the negative consequences of an excessively optimistic mindset may, in part, be a side product of the true driver, low cognitive ability.

Published in

Personality and Social Psychology Bulletin

DOI

https://doi.org/10.1177/01461672231209400

ISSN

1461672

Subjects

Notes

Open Access

Online Early

© 2023 by the Society for Personality and Social Psychology, Inc.

This article is distributed under the terms of the Creative Commons Attribution 4.0 License (https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access page (https://us.sagepub.com/en-us/nam/open-access-at-sage).

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