In
behavioral finance
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, the ostrich effect is the attempt made by investors to avoid negative financial information. The name comes from the common (but false)
legend
A legend is a Folklore genre, genre of folklore that consists of a narrative featuring human actions, believed or perceived, both by teller and listeners, to have taken place in human history. Narratives in this genre may demonstrate human valu ...
that
ostrich
Ostriches are large flightless birds of the genus ''Struthio'' in the order Struthioniformes, part of the infra-class Palaeognathae, a diverse group of flightless birds also known as ratites that includes the emus, rheas, and kiwis. There are ...
es bury their heads in the sand to avoid danger.
Originally the term was coined by , and was defined as "the avoidance of apparently risky financial situations by pretending they do not exist", but since it took the slightly broader meaning of "avoiding to expose oneself to
inancialinformation 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
explain differences in returns in the
fixed income
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
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 determined that people in
Scandinavia
Scandinavia; Sámi languages: /. ( ) is a subregion#Europe, subregion in Northern Europe, with strong historical, cultural, and linguistic ties between its constituent peoples. In English usage, ''Scandinavia'' most commonly refers to Denmark, ...
looked up the value of their investments 50% to 80% less often during bad markets.
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 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
MeerKAT, originally the Karoo Array Telescope, is a radio telescope consisting of 64 antennas in the Meerkat National Park, in the Northern Cape of South Africa. In 2003, South Africa submitted an expression of interest to host the Square Kilom ...
effect".
See also
*
Confirmation bias
Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms or supports one's prior beliefs or values. People display this bias when they select information that supports their views, ignoring ...
*
Denial
Denial, in ordinary English usage, has at least three meanings: asserting that any particular statement or allegation is not true (which might be accurate or inaccurate); the refusal of a request; and asserting that a true statement is not true. ...
*
Elephant in the room
The expression “the elephant in the room” (or "the elephant in the living room") is a metaphorical idiom in English for an important or enormous topic, question, or controversial issue that is obvious or that everyone knows about but no one me ...
* Myopic
loss aversion
Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in the domain of economics. What distinguishes loss aversion from risk aversion is that the utility of a monetary payoff depends o ...
*
Schrödinger's cat
In quantum mechanics, Schrödinger's cat is a thought experiment that illustrates a paradox of quantum superposition. In the thought experiment, a hypothetical cat may be considered simultaneously both alive and dead, while it is unobserved in ...
*
Selective exposure
Selective may refer to:
* Selective school, a school that admits students on the basis of some sort of selection criteria
** Selective school (New South Wales)
Selective strength: the human body transitions between being weak and strong. This ran ...
References
Overview
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Papers
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External links
{{wiktionary, head in the sand
Adages
Behavioral finance
Cognitive biases
Metaphors referring to birds