The Ostrich Effect

The Ostrich Effect

The Ostrich Effect

 

“We know – intellectually – that confronting an issue is the only way to resolve it. But any resolution will disrupt the status quo. Given the choice between conflict and change on the one hand, and inertia on the other, the ostrich position can seem very attractive.”

Margaret Heffernan

“Mankind has tried the other two roads to peace – the road of political jealousy and the road of religious bigotry – and found them both equally misleading. Perhaps it will now try the third, the road of scientific truth, the only road on which the passenger is not deceived. Science does not, ostrich-like, bury its head amidst perils and difficulties. It tries to see everything exactly as everything is.”

Garrett P. Serviss

 

It is common belief that ostriches bury their heads in the sand when confronted by a threat. First things first, that is not true at all, and ostriches never hide themselves in this manner. However, we people tend to do so, and it is considered a serious cognitive bias.

The term was first used in a 2003 paper, “The   ‘Ostrich   Effect’   and   the relationship between the Liquidity and the Yields of Financial Assets”, by Galai and Sade. According to this paper, “….We define the ‘Ostrich Effect’ as avoiding apparently risky situations by pretending they do not exist. It is observed that certain individuals, when faced with uncertain investments, prefer investments for which the risk is unreported, over a similar investment (as far as risk and return are concerned) for which the risks are frequently reported. In more concrete terms: if a “loss-averse” investor is faced by an investment opportunity in a traded government bond, where the price is reported on a daily basis, or alternatively, to invest in a non-negotiable bank deposit for the same term, the “Ostrich Effect” predicts that he/she will tend to prefer the bank deposit, especially during periods of increased uncertainty.”

In other words, the Ostrich Effect refers to our tendency to ignore potential monetary or financial problems instead of finding a way to tackle them. Put simply, people tend to avoid discomforting information. This is similar to burying one’s head in the sand. For example, in a bear market, investors may ignore their portfolios, in an attempt to avoid the negative information. Another example is when people avoid checking their bank accounts’ balance, afraid of what the standing might be.

 

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Further reading

The ‘Ostrich Effect’ and the Relationship between the Liquidity and the Yields of Financial Assets

The ostrich effect: selective attention to information

What do Ostriches and Finance Have in Common?

‘The Ostrich Problem’: Motivated Avoidance or Rejection of Information About Goal Progress

Should You Fear the Ostrich Effect?