What do Ostriches and Finance Have in Common?
In college it is hard to save money. With the costs of textbooks, late night pizza, and online shopping, I know my bank account is looking a little scary. Often times I find myself avoiding looking at my bank app because I’m afraid to see what my bank statement is, but on payday it is the first thing that I check. Why is that?
This tendency – to avoid checking financial standings when we know that they could be bad – is known as “the ostrich effect,” and is defined as the tendency for people to ignore their problems with the hopes that they will just disappear, similarly to how an ostrich hides their head in the sand when they are hiding from danger, and this tendency is not seen only in broke college students.
Bill Kahn is an organizational psychologist who has recently started studying the ostrich effect and its involvement in the business and finance world. He found that when co-workers had unspoken conflict with each other, it led to conflict in the work place. The partners he was working with each chose not to address the fact that their friendship had been drifting apart in the hopes that everything would just work out on its own, but it began to spill over into their business and it made getting work done almost impossible. It wasn’t issues going on at work that created this conflict. Instead, when there was an unaddressed personal issue between co-workers, they would bring it to the workplace, making it difficult for projects to be completed. Kahn noticed situations like this in many of the business that he worked with, and the root of most of the conflicts he dealt with could have been resolved if the people involved spoke about their problems instead of avoiding them. For more information on the background of the ostrich effect and Kahn’s work, click here.
Previous research has defined the ostrich effect in the financial world as investors ignoring their stocks during less successful weeks (Karlsson, Loewenstein, Seppi, 2005) and as investors purposefully avoiding risky information regarding their stocks (Galai & Sade, 2006). A study run by Brown and Kagel (2007) asked investrsto pick one stock to hold based off of the given values and capital gains. After each round, participants were allowed to look back at the performance of other stocks and could switch if a different stock was doing better. In this study, the ostrich effect comes into play because participants have the option to not look at how the stocks performed after they pick one. Not looking at how the stocks gave participants the chance to avoid possibly receiving negative information about their own choice. Similar studies have used this procedure, or variations of this procedure, where investors are given the opportunity to pick a stock and the amount of times they check that stock and the status of the stock when they check on it (is the stock doing poorly or not) are looked at. In general, it has been found that investors tend to avoid looking at their stocks and investments when they are aware that there is a chance that their stock or investment isn’t doing well (Karlsson, Loewenstein, & Seppi, 2009), showing that the ostrich effect is present in the finance world and is affecting the way investors work.
So how does the ostrich effect relate to cognition and Cognitive Psychology: Selective attention and metacognition. Selective attention is the idea that we can decide what we focus our attention on. For example, in the Stroop Task, participants are asked to read a word and ignore the color of the word. This task becomes difficult when the words are colors, and the colors of the words don’t match the actual word. In general, it was found that participants were worse at naming incongruent words (color of word and word didn’t match), but it was still possible, showing that people are able to selectively attending to things. While people working in finance aren’t having to distinguish colors and words, they are having to distinguish between stocks doing well and stocks doing poorly each week. Karlsson’s, Loewenstein’s, and Seppi’s (2009) study gave investors the opportunity to decide when they received information about different investments and what stocks to focus on after receiving outside information. In general, investors were successful in identifying risky stocks and actively paid less attention to them. In other words, they were deciding what they wanted to focus their attention on, and in general, they were focusing on stocks they knew would be successful. Along side selective attention, this is where metacognition plays a role in the ostrich effect. In Karlsson’s, Loewenstein’s, and Seppi’s (2009) study, participants made the decision to focus on the more successful stock. In other words, they made the conscious decision to avoid looking at the failing stock because they did not want to face the negative repercussions (Webb, Chang, & Benn, 2013). In other words, they were purposefully focusing on the less stress inducing stocks.
So why does this all matter? Why is the ostrich effect so important? If these are your questions, also ask yourself this: Do I want my financial advisors to ignore a bad investment? Do I want another situation like the Great Depression to happen? While that may be an extreme case of the ostrich effect, it is still something that is possible. Though it may not seem like a big deal, ignoring finances can cause a lot of problems down the road, like the Great Depression. And even as a simple college student, ignoring a bank account can lead to over drafting, and not knowing how much money you have saved can be a problem in cases of emergencies. So the next time you plan on sticking your head in the ground to avoid danger, just remember that the danger can still see you even if you can’t see it.
References
Brown, A. L, & Kagel, J. H., (2009). Behavior in a simplified stock market: the status quo bias, the disposition effect and the ostrich effect. Annals of Finance. 5, 1-14. doi: 10.1007/s10436-007-0092-0
Galai, D., & Sade, O., (2006). The “ostrich effect” and the relationship between the liquidity and yields of financial assets. The Journal of Business. 79, 2741–2759. doi: 10.1086/505250
Karlsson, N., Loewenstein, G., & Seppi, D.J, (2005). The “ostrich effect”: selective attention to information about investments. Journal of Risk and Uncertaint . 38, 95-115. doi: 10.1007/s11166-009-9060-6
Webb, T. L., Chang, B. P. I., & Benn, Y. (2013). ‘The ostrich problem’: Motivated avoidance or rejection of information about goal progress. Social and Personailty Psychology Compass. 7, 794-807. doi: 10.1111/spc3.12071
Hello, I really enjoyed this post because I can see the many ways that I, and the people around me are affected by the ostrich effect. I have heard countless times of friends overdrawing their bank accounts because they don’t want to check and see how little money they have, and often me and many people I know never want to check the grades that we got on a test or paper, because we are afraid that it will be bad and make us upset. I think this is a really important topic because we often think “ignorance is bliss,” when that is definitely not the case. I think it is interesting how you ties the Stroop Effect to the Ostrich effect, because it demonstrates how it is difficult to override our automatic processes, and if we do not have the metaconition to understand that it could be potentially bad to ignore our problems, such as not checking our bank account, then we will automatically continue to do so. However, once we can understand the Ostrich effect and see that it is important and helpful to face our problems so that they don’t become worse, we can overcome these automatic actions. This relates to studies done on false memory in eyewitness testimonies, because people assume that eyewitness testimonies are very accurate, which has been proven to not be true. Once research was done on eyewitness testimony to show how memory can be suggestible and biased by our experiences, they were able to try to change the way that detectives ask questions so that the testimonies can be more accurate. It also helps that we now understand that eye witness testimony should not be taken as the most important evidence. This shows how facing problems rather than ignoring them can be very important and helpful.
I like this post because it clearly has many applications to our lives. I wonder if the attentional component might also be related to negative priming. In a negative priming task, a response is inhibited from one trial to the next because it was not the target response. Obviously, most people do not want their finances to be doing poorly because it will cause them to stress and worry. So, maybe when people have an idea that their bank account is running low or their stocks aren’t doing well (the “prime”) this leads them to “inhibit” the checking behavior they would normally perform on their finances and try to ignore it instead. I think this could also apply to other examples of the ostrich effect such as the interpersonal relationship problems you mention in which both people notice the negative changes, but then try their best not to pay attention to them because it is undesirable. Also, I think the ostrich effect relates in a way to my post which talked about the empathy gap. Part of the empathy gap refers to people not understanding how much their behavior is influenced by their emotions when they are very upset. I think this is similar to the ostrich effect in that people probably have an awareness that they don’t like their behavior when overly emotional (like they probably know their bank account is a little low) and therefore they try not to think too much about why it is happening or whether they are being controlled by their emotions (like they try to avoid thinking about or facing the low balance in their bank accounts). It seems that many cognitive biases are affected by our own views of ourselves and what we want to believe/pay attention too which is very interesting!
Of the posts I read, this post was the most relatable one. Not only because the applications, for the most part, are age appropriate but because I felt it was written for me. Avoiding responsibilities and work hoping it’ll somehow get better has been a big problem for me since I have been at Colby. Never did I explore why I was doing what I was doing. While reading this, I was reminded of some information I came across during the research I did for my post. Specifically, I connected the attention we as people place on negative situations. Our tendency to avoid, ignore, or accept bad things or outcomes seems to impact our lives significantly. I read about the prospect theory in Mollie Rich’s post about the Sunk Cost Fallacy and feel it very well puts what I am trying to say together. That fear we have of losing regardless of what we would be winning combined with Murphy’s Law (“if something can go wrong, it will”) demonstrates little space for growth towards a change.