Ostrich effect

In behavioral finance, the ostrich effect is the attempt made by investors to avoid negative financial information. The name comes from the common (but false) legend that ostriches bury their heads in the sand to avoid danger.

Originally the term was coined by Galai & Sade (2006), and was defined as "the avoidance of apparently risky financial situations by pretending they do not exist", but since Karlsson, Loewenstein & Seppi (2009) it took the slightly broader meaning of "avoiding to expose oneself to [financial] information that one fear may cause psychological discomfort". For example, in the event of a market downturn, people may choose to avoid monitoring their investments or seeking out further financial news.

Research

Galai & Sade (2006) explain differences in returns in the fixed income market by using a psychological explanation, which they name the "ostrich effect," attributing this anomalous behavior to an aversion to receiving information on potential interim losses. They also provide evidence that the entrance to a leading financial portal in Israel is positively related to the equity market. Later, research by Karlsson, Loewenstein & Seppi (2009) determined that people in Scandinavia looked up the value of their investments 50% to 80% less often during bad markets.

Galai & Sade (2006) also found that investors prefer financial investments where the risk is unreported over those with a similar risk-return profile and frequently reported risks, saying that investors are willing to pay a premium for "the bliss of ignorance".

Criticism

A study by Gherzi et al. (2014) showed no perceivable attempt by investors to ignore or avoid negative information, but instead found that "investors increase their portfolio monitoring following both positive and daily negative market returns, behaving more like hyper-vigilant meerkats than head-in-the-sand ostriches". They dubbed this phenomenon "meerkat effect".

See also

Bibliography

Overview
  • Mallard, Graham (2015). Bounded Rationality and Behavioural Economics. Routledge. pp. 13–14. ISBN 9781317653851.CS1 maint: ref=harv (link)

Papers
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