Beware of the “ostrich Effect” When It Comes to Your Financial Health.
Money has already become somewhat of a taboo topic, and in bad financial times, we tend to ignore it even more. Researchers call this the “ostrich effect” and you need to keep an eye on it in certain areas of your finances.
In a study published in the Social Science Research Network , researchers looked at the financial behavior of investors and found that when their income lags behind, they tend to bury their heads in the sand (hence the ostrich) and ignore risk (of course, it’s not necessarily a bad thing when it comes to investing – more on that later). The researchers reported:
Drawing on insights from behavioral finance, in particular from the mental accounting literature, we provide an explanation for the observed anomaly, which we call the “ostrich effect.” We define the “ostrich effect” as avoiding clearly risky situations by pretending they don’t exist . It has been observed that certain individuals, when faced with uncertain investments, prefer investments for which risk are not reported over similar investments (in terms of risk and return), for which risks are often reported. More specifically, if a “loss-averse” investor is faced with the option of investing in tradable government bonds, the price of which is reported daily, or, alternatively, investing in a non-negotiable bank deposit for the same amount. the term “ostrich effect” suggests that he / she will prefer a bank deposit, especially in times of heightened uncertainty.
When it comes to investing, the ostrich effect can work a little differently. We have already told you that successful investing means that you create a portfolio with the right amount of risk for your situation, and then buy and hold. As Warren Buffett points out , you shouldn’t worry about the daily fluctuations in the market. But even when investing, you still want to know your risk, you just don’t want to panic when that risk arises.
But we often bury our heads in the sand when it comes to other areas of our finances, and this trend can be problematic. Sometimes we prefer to pretend that our money problems do not exist than to solve them, and this usually makes them worse. LearnVest notes that people often choose to ignore bad news about steep credit card statements, taxes, or late bills. For instance:
The Ostrich Effect can tempt us to tackle these piles of receipts and letterheads at the last minute, making us struggle to collect them in early April. When you give up tax preparation, you run the risk of not having enough money to cover your account, and you also miss out on the opportunity to fund your retirement accounts . You are also more likely to make reckless mistakes when returning, which can lead to costly fines.
We’ve probably all been to blame for this at some time, so there’s a lot to think about if there’s an area of your financial life that you’ve been ignoring.
Check out the research and the rest of the post at the link below.
“OSTRICH EFFECT” AND RELATIONSHIP OF LIQUIDITY AND PROFITABILITY OF FINANCIAL ASSETS | Social Science Research Network through LearnVest