{"id":2714,"date":"2017-05-07T03:18:39","date_gmt":"2017-05-07T07:18:39","guid":{"rendered":"http:\/\/web.colby.edu\/cogblog\/?p=2714"},"modified":"2017-09-06T13:33:16","modified_gmt":"2017-09-06T17:33:16","slug":"what-do-ostriches-and-finance-have-in-common","status":"publish","type":"post","link":"https:\/\/web.colby.edu\/cogblog\/2017\/05\/07\/what-do-ostriches-and-finance-have-in-common\/","title":{"rendered":"What do Ostriches and Finance Have in Common?"},"content":{"rendered":"
\"https:\/\/www.slideshare.net\"<\/a>

Ostrich Effect<\/a><\/p><\/div>\n

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\u2019m afraid to see what my bank statement is, but on payday it is the first thing that I check. Why is that?<\/p>\n

This tendency \u2013 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.<\/p>\n

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\u2019t 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,\u00a0click here.<\/a><\/p>\n

 <\/p>\n

\"\"<\/a>

Stock Performance<\/a><\/p><\/div>\n

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\u2019t doing well (Karlsson, Loewenstein, & Seppi, 2009), showing that the ostrich effect is present in the finance world and is affecting the way investors work.<\/p>\n

\"\"

Stroop Task<\/a><\/p><\/div>\n

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<\/a>, 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\u2019t match the actual word. In general, it was found that participants were worse at naming incongruent words (color of word and word didn\u2019t match), but it was still possible, showing that people are able to selectively attending to things. While people working in finance aren\u2019t having to distinguish colors and words, they are having to distinguish between stocks doing well and stocks doing poorly each week. Karlsson\u2019s, Loewenstein\u2019s, and Seppi\u2019s (2009) study<\/a>\u00a0gave 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<\/a>\u00a0plays a role in the ostrich effect. In Karlsson\u2019s, Loewenstein\u2019s, and Seppi\u2019s (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.<\/p>\n

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\u2019t see it.<\/p>\n

References<\/p>\n

Brown, A. L, & Kagel, J. H., (2009). Behavior in a simplified stock market: the status quo bias, the disposition effect and the ostrich effect.\u00a0Annals of Finance<\/em>. 5, 1-14. doi: 10.1007\/s10436-007-0092-0<\/p>\n

Galai, D., & Sade, O., (2006). The \u201costrich effect\u201d and the relationship between the liquidity and yields of financial assets.\u00a0The Journal of Business<\/em>.\u00a079<\/em>, 2741\u20132759. doi: 10.1086\/505250<\/p>\n

Karlsson, N., Loewenstein, G., & Seppi, D.J, (2005). The \u201costrich effect\u201d: selective attention to information about investments.\u00a0Journal of Risk and Uncertaint<\/em>\u00a0. 38,\u00a0<\/em>95-115. doi: 10.1007\/s11166-009-9060-6<\/p>\n

Webb, T. L., Chang, B. P. I., & Benn, Y. (2013). \u2018The ostrich problem\u2019: Motivated avoidance or rejection of information about goal progress. Social and Personailty Psychology Compass. 7, 794-807. <\/em>doi: 10.1111\/spc3.12071<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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\u2019m afraid to see what my bank statement is, but on payday it is […]<\/p>\n","protected":false},"author":7045,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[80216,130416,370833],"tags":[149745,150439],"_links":{"self":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/2714"}],"collection":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/users\/7045"}],"replies":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/comments?post=2714"}],"version-history":[{"count":32,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/2714\/revisions"}],"predecessor-version":[{"id":3407,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/2714\/revisions\/3407"}],"wp:attachment":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/media?parent=2714"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/categories?post=2714"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/tags?post=2714"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}