Looking on the (B)right Side of Life: Cognitive Ability and Miscalibrated Financial Expectations

Abstract

Evidence claims that looking on the bright side of life is a hallmark of high cognition. Our claim is those with high cognition—as measured by a broad range of cognitive skills, including memory, verbal fluency, fluid reasoning and numerical reasoning—tend to look more on the right side. Using data from a large nationally representative UK sample (N=36,540), we find that those higher in cognitive ability have a higher incidence of realism and pessimism in their expectations and a lower incidence of unrealistic optimism. We operationalize unrealistic optimism as the difference between a person's financial expectation and the financial realization that follows, measured annually over a decade. Our results suggest that the well documented negative consequences of unrealistic optimism may be a side product of the true driver, lower cognitive ability. However, even those high in cognition are found to display significant errors in judgement.

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