Researchers from the University of Bath in the United Kingdom identified a link between financial optimism and cognitive performance. Specifically, they observed that people who overestimate their current and future income while underestimating the likelihood of negative financial events tend to perform differently on cognitive tasks. The findings were published in the Personality and Social Psychology Bulletin (PSPB) and contribute to a growing understanding of how mindset and mental processes intersect with money expectations. [Citation: University of Bath study, PSPB]
The investigation drew on data from Understanding Society, a large, ongoing annual survey that tracks financial circumstances and anticipated income and expenses across the population. In this study, roughly 36,312 participants in Britain were followed from 2009 to 2021. The researchers gathered detailed responses about each person’s financial situation and their predictions about future earnings and expenditures, creating a rich dataset to probe the links between cognition and financial outlook. [Citation: Understanding Society data source]
To gauge cognitive ability, participants underwent a series of standardized assessments. These tests examined memory status, speech fluency, thinking fluency and coherence, and counting capacity. The analysis revealed a clear pattern: individuals with higher cognitive functioning tended to approach their financial future with more realism or even cautious pessimism. They were more likely to recognize potential costs associated with major life events such as divorce or a health downturn, and to factor in possible financial risks into their expectations. [Citation: Cognitive assessment methods]
Conversely, volunteers showing lower cognitive performance tended to be more optimistic about what their finances might hold. On average, they overestimated future income while underestimating future expenses. Importantly, this pattern persisted even after controlling for other variables, including education level. The researchers therefore proposed that the association between cognitive ability and financial optimism is not entirely explained by schooling or financial literacy alone. [Citation: Regression controls]
The authors also discussed a dual-process view of human thinking. They described two mental systems: one intuitive, fast, and automatic, and another analytical, slower and more deliberate. Higher cognitive capacity is thought to enable better engagement of the analytical system, allowing individuals to critically evaluate automatic judgments and the quick conclusions generated by intuitive thought. This framework helps explain why some people more accurately foresee financial risks while others are prone to over-optimism. [Citation: Dual-process theory reference]
Additionally, the study contributes to a broader conversation about how education, experience, and cognitive style shape financial behavior. It suggests that simply having more schooling may not fully account for how people project earnings, manage debts, or prepare for unforeseen health or life events. The implications extend to personal finance guidance, policy design, and financial literacy programs, emphasizing the value of cultivating analytical thinking alongside practical knowledge. [Citation: Implications
While the results add nuance to the relationship between mind and money, they also point to potential pathways for reducing financial risk through improved cognitive strategies. Encouraging people to pause after quick judgments, compare multiple scenarios, and consider low-probability, high-impact events could help align expectations with likely outcomes. Such approaches may help individuals make more resilient financial plans and reduce the costs associated with misjudgments during periods of economic stress. [Citation: Practical applications]