Going by the latest research, to quote Gen Z, being ‘delulu might not be the solulu’.
We’re often told to stay positive. While these ideas are often deeply associated with well-being and success, there can be a downside to it too, especially with regard to financial matters, according to research. A little too much of optimism can effectively cloud your judgement and decision-making. It could have dire consequences, leading to drowning in debt and business failures.
According to a new study published in Personality and Social Psychology Bulletin, from the University of Bath, England, there’s an intriguing connection between cognitive skills and a person’s inclination to optimism. Contrary to what most self-help books say, people with higher cognitive abilities are a lot more realistic and maybe just a tad pessimistic. The study focused on specific cognitive skills, including verbal fluency, fluid reasoning and memory.
Titled, Looking on the (B)right Side of Life: Cognitive Ability and Miscalibrated Financial Expectations, the study surveyed over 36,000 households in the UK. It observed people’s expectations regarding their financial well-being, and compared them to their actual financial outcomes.
This was measured annually for a decade. It was found that in many cases, plans that were based on overly optimistic beliefs, made for poor decisions. This was found in people with lower cognitive abilities. These were bound to deliver worse outcomes than would realistic beliefs. In other words, the bright glow of optimism cast a shadow on their financial well-being. Meanwhile, those who didn’t see the glass half-full or overflowing, made sound financial choices. They could balance optimism with realism. They had higher cognitive abilities.
Chris Dawson, a lead researcher for the paper, told the outlet that people tend to delude themselves to a degree. “The problem with our being programmed to think positively is that it can adversely affect our quality of decision-making, particularly when we have to make serious decisions,” he said. He summarised that the research showed that realistic or pessimistic people with high cognitive ability manage decision-making better than those with low cognitive ability, who are excessively optimistic.
“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 added.
The neural underpinnings of optimism
What goes on in the brain, when we feel a rush of optimism?
British neuroscientist Tali Sharot, who conducted a variety of experiments on the neural basis of optimism in the past decade, explained the workings of the brain in her 2012 book, The Optimism Bias. She noted how directing thoughts of the future towards a positive outcome, is the result of the frontal cortex’s communicating and subcortical regions deep in the brain. There is a strong amount of activity in the brain, when a person imagines something optimistic and desirable.
The frontal cortex, she explained, is critical for many complex human functions such as language and goal setting. Using a functional magnetic resonance imaging (fMRI) scanner, she recorded brain activity in volunteers as they imagined specific events that might occur to them in the future. In some cases, she asked them to imagine desirable events, and others undesirable, like losing a wallet or ending a relationship. The volunteers reported that the images of their sought-after events were far richer and vivid than those of unwanted events.
She noted the enhanced activity in the two critical regions of the brain: The amygdala, a structure deep in the brain that processes information, and the rostral anterior cingulate cortex (rACC). The rACC is an area of the frontal cortex that modulates emotion and motivation. “The rACC acts like a traffic conductor, enhancing the flow of positive emotions and associations. The more optimistic a person was, the higher the activity in these regions while imagining positive future events, relative to negative ones, and the stronger the connectivity between the two structures,” she wrote. This could lead to a release of dopamine, the happiness hormone, which acts on parts of the brain that give you feelings of pleasure, satisfaction and motivation.
Dopamine impacts belief formation by reducing negative expectations regarding the future, as studies have shown. It also impairs the ability to update beliefs in response to undesirable information, which can prove dangerous when it comes to decision-making and sound judgements.
The optimism bias: How toxic positivity hinders cognitive agility
Unrealistic optimism or excessive optimism bias, as it’s referred to, can spell havoc, especially with regard to financial choices. Optimism bias is a cognitive bias that leads people to underestimate the probability of negative events.
They will overestimate the likelihood of positive events happening to them. In precarious situations of uncertainty, a person’s excessive optimism might compel them to make a poorly informed choice, which is a recipe for disaster, explains Eleanore Weber, an Abu Dhabi-based American psychologist. This constant gravitation towards optimism implies weakening cognitive abilities.
Optimism bias and cognitive agility
Excessive optimism can impact cognitive agility, which implies the ability to adapt and shift our thought processes. Mohammad Nami, an assistant professor of neuroscience and cognitive neuropsychology in the department of Social Sciences at Canadian University Dubai, explains further, “Cognitive agility depends on the balance between critical appraisal for possible options and processing speed,” he explains.
When someone is overly optimistic and excessively positive, they can overlook potential risks or challenges. This can be linked to impaired cognitive ability, he says. As a person consistently indulges in the optimism bias, they avoid trying to solve a problem and “just keep hoping in the best” and that the “universe will do the rest”.
When someone is overly optimistic and excessively positive, they can overlook potential risks or challenges. This can be linked to impaired cognitive ability. Toxic positivity, characterised by the denial or invalidation of negative emotions can hinder cognitive agility by suppressing genuine reactions
Explaining further what optimism bias is, Nami says, “It can also affect one’s ability to change circumstances or consider alternate perspectives. There is also empirical evidence that suggest that toxic positivity, characterised by the denial or invalidation of negative emotions can hinder cognitive agility by suppressing genuine reactions. It prevents constructive problem-solving. In order to have cognitive flexibility, one needs to strike a balance between optimism and realistic assessment,” he says.
There could be several psychological reasons behind optimism bias as well, adds Weber. For instance, people believe that they have the necessary skills and knowledge to get things to work out, even when they don’t. They might also perceive negative events as ‘unlikely’. For instance, a person might not save properly and be a spendthrift, because they don’t foresee an emergency in the future. However, when disaster strikes, they find themselves in a dire situation.
How optimism bias can impair different aspects of your life
The excessive optimism can impact a person’s life in several different ways, as explained by Chen Changcai in his book, How to Think Clearly: A Guide to Human Cognitive Biases, published in 2023.
Financial planning: People tend to ovestimate their investment returns or their ability to meet financial goals. This leads them to save less, or take on more debt than they can. This results in poor decision-making and inadequate preparation for the future. This is also seen in the case of retirement planning, where people underestimate the amount of savings needed. They overestimate the financial resources available, which leads to a dearth of retirement funds and financial troubles later.
Entrepreneurship and business ventures: Entrepreneurs show an optimism bias when they start a new business. They tend to overestimate the probability of success and underestimate the risks and challenges involved. As a result, there is a lack of contingency planning, increase of unrealistic expectations, and accelerating the chances of failure.
In relationships: Sometimes, people indulge in optimism bias in their relationships. They believe that their partnership is infallible. This leads to complacency, and they’re less likely to invest more effort in the relationship and avoid addressing crucial issues.
Social comparisons: Optimism bias can also influence how people compare themselves to others. They see themselves as more talented, attractive, or successful than another person. This leads to overconfidence and a rather skewed self-perception.
Combating excess optimism
How do we remain hopeful, reaping benefits from it, while simultaneously protecting ourselves from the downsides of it?
Awareness, emphasises Weber. “Once we realise that many of our dreams are actually optimistic illusions, we can strive to strike a balance,” she says. Sharot had also emphasised in her book, that knowledge is key. We need to keep learning and being open to opportunities, chances and learning from experiences.
You need to accept that there are negative outcomes in every event: It doesn’t mean you grow overly pessimistic and think all is lost, adds Weber. You need to learn how to think rationally, accept failures, and learn from other’s failures. The possible negative outcomes of every situation also need to be analysed. Work backwards if you must: Imagine something has gone wrong, see how you can prevent that failure. Here, you analyse each threat, and can take preventive actions to avoid the disaster.
Instead of constantly focusing on profits all the time, see how you can focus on avoiding the losses. Reframe the narrative, she advises.