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Cognition

Do You Like to Think?

When it comes to your financial decisions, how much you enjoy thinking matters.

Key points

  • The desire for deep, reflective thought is called need for cognition (NFC).
  • NFC can benefit personality characteristics such as openness, conscientiousness, and curiosity.
  • NFC can affect personal finances, including one's motivation to attend to finances and susceptibility to subtle cues and emotions.

In your job, what kind of task do you enjoy the most? Is it one that involves interacting with people, working with your hands, or maybe applying deep thought? If it’s the last of these, chances are you have a high Need for Cognition (NFC).

When we make decisions, we all rely on varying degrees of reflective thought, which is sometimes referred to as a System 2 process. People with high NFC have a disposition to favor System 2 thinking. They are motivated to put effort into their thinking because they enjoy being cognitively challenged.

NFC positively impacts other aspects of individuals’ personality, such as openness to experience, conscientiousness, and curiosity.

NFC is commonly assessed with a standard psychological scale. People are asked how much they agree with different statements, such as “I would prefer complex to simple problems”, “I only think as hard as I have to” or “I really enjoy a task that involves coming up with new solutions to problems”.

The relevance of NFC is far reaching and affects decisions in every domain of life.

In personal finance, NFC can affect the following areas, for example:

  1. Your motivation to attend to financial materials: The higher your NFC, the more effort you are likely to put effort into gathering and processing financial information. Having more information will improve your knowledge about the decision and options at hand.
  2. Your susceptibility to subtle cues or choice architecture: The higher your NFC, the less likely it is that your choices of financial products are affected by relatively non-conscious heuristic processes, such as those found in framing, defaults, or social proof. This will reduce biases and enhance the quality of your decisions.
  3. The extent to which you are swayed by your emotions: The higher your NFC, the better you should be at ignoring how you feel at the time you are making a decision that involves risk, such as investing. This is likely to improve the consistency of your decisions.

Can you increase your Need for Cognition? It depends. Just like any other personality trait, NFC is relatively stable. However, this doesn’t mean it can’t change with age or new knowledge and experience. While you may not be able to make yourself like the process of thinking hard about a decision, you can improve your decision-making if you apply the techniques commonly used to debias decisions.

It's also important to bear in mind that high NFC has a flipside. While many biases can be made worse by a lack of systematic thought (cognitive shortcuts), having a high NFC may cause its own problems, such as “excessive searching bias” or overcorrecting for bias. In other words, if you enjoy cognition too much, you may end up overdoing it when you gather information to support your decision, overthink the pros and cons of a given option, and even second-guess yourself.

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