Optimistic simplifiers used to have an easier time making smart financial decisions

Newsweek asks whether certain people are wired to make poor financial decisions by simplifying complex problems. A study by some cognitive neuroscientists suggests yes, and says this group contains many extroverts who are 1) optimistic about their lives and 2) impulsive.

In the past, however, these optimistic simplifiers would have been better off because mortgages and even credit card rules were simpler, says Richard Thaler, a behavioral economist at the University of Chicago and the coauthor of Nudge: Improving Decisions About Health, Wealth, and Happiness. In the late-’70s/early-’80s, when the 30-year, fixed-rate mortgage was pretty much the only loan option, a “rule of thumb” worked well: You looked for one number, the annual percentage rate, decided if you could afford it and then signed on the dotted line (or walked away). “Once mortgages got very, very complicated,” Thaler says, “doing the correct analysis required having a Ph.D. in economics”-and simplifying under those circumstances became dangerous.

Tags: financial crisis, mortgages