A Little-Known Bias with a Big Impact

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A groundbreaking study by Chaoran Chen et al., titled "Mediating Role of Optimism Bias and Risk Perception Between Emotional Intelligence and Decision-Making: A Serial Mediation Model," has shifted the spotlight from data and numbers to a softer skill: emotional intelligence (EQ).

While the study examined investor behavior in the commodity market, the findings are more generally applicable.

The primary findings

The study's primary findings relate to optimism bias and how emotional intelligence impacts investment decisions.

Optimism bias causes investors to believe they are less likely than others to experience negative events. Investors with optimism bias tend to underestimate the likelihood of adverse occurrences while overestimating the probability of positive outcomes.

The study found EQ impacts how optimistic a person tends to be regarding the outcome of their investments. People with higher EQ might better manage their optimism, ensuring that unrealistic expectations of positive outcomes do not overly influence their investment decisions.