Neither an Optimist Nor a Pessimist Be: Mistaken Expectations Lower Well-Being

Abstract

This article speaks to the classic view that mental health requires accurate self-perception. Using a representative British sample ( N = 1,601) it finds that, as measured by two established well-being indicators, those with mistaken expectations, whether optimistic or pessimistic, do worse than realists. We index unrealistic optimism as the difference between financial expectations and financial realizations measured annually over 18 years. The effects are not small, with those holding the most pessimistic (optimistic) expectations experiencing a 21.8% (13.5%) reduction in long-run well-being. These findings may result from the decision errors and counteracting emotions associated with holding biased beliefs. For optimists, disappointment may eventually dominate the anticipatory feelings of expecting the best while for pessimists the depressing effect of expecting doom may eventually dominate the elation when the worst is avoided. Also, plans based on inaccurate beliefs are bound to deliver worse outcomes than would rational expectations.