Ostrich Effect

The ostrich effect is the tendency to avoid acquiring information when the information is expected to be unpleasant. In finance it takes the specific form of not looking at accounts, statements and portfolio values during periods when they are likely to have fallen, and looking frequently when they are likely to have risen.

The term has two senses and they are not interchangeable, so it is worth saying which is which. Karlsson, Loewenstein and Seppi, in "The ostrich effect: Selective attention to information," published in the Journal of Risk and Uncertainty in 2009, attribute the coinage to Galai and Sade, who they say "defined the ostrich effect as 'avoiding apparently risky financial situations by pretending they do not exist.'" That first sense is about avoiding the situation. Karlsson, Loewenstein and Seppi then say plainly: "We use the term in a related, but expanded sense, as avoiding exposing oneself to information that one fears will cause psychological discomfort." That second sense, about avoiding the information rather than the exposure, is the one this entry covers.

The name is a nice image and a false one, which the authors note in their own footnote. Ostriches do not bury their heads in the sand. Citing the Canadian Museum of Nature, the paper records that a threatened hen sitting on a nest "presses her long neck flat along the ground, blending with the background."

The evidence is behavioral data rather than a laboratory task, which is unusual in this territory. The paper's model predicts that people will "monitor and attend to information more actively given preliminary good news but 'put their heads in the sand' by avoiding additional information given adverse prior news," and then tests it against account monitoring by Scandinavian and American investors. The finding, in the authors' summary: "In both datasets, investors monitor their portfolios more frequently in rising markets than when markets are flat or falling."

Two details in that sentence are easy to skate past and both matter. The first is flat. The effect is not only about avoiding bad news; the conclusions describe the model as predicting that individuals "may collect additional information conditional on favorable news and avoid information following neutral or bad news." Ambiguity is enough. The second is what was actually measured: logins, not decisions. The datasets record how often people looked, not what they did afterward, so the finding is about attention rather than about trading.

The reasoning behind it is not simply that people are being foolish, and the authors are careful about this. Their model treats information as having a hedonic cost, so choosing not to look can be a rational response to knowing that looking will feel bad. In their words, "whether the ostrich effect is rational depends on the accuracy of people's assessments of how potential information will make them feel. Our model is exposited assuming these assessments are accurate, so our story does not require irrationality." There is even an argument that it helps: selective exposure, they write, "may also play an evolutionary role in helping people live with risk and, thereby, obtain the potential long-term benefits of risk-taking," so in a finance context the effect "may lower, to some extent, the required market equity premium."

The cost, when there is one, is not the unopened statement. The same passage gives the qualification: the effect "can also induce costs due to delays in information acquisition in adverse environments." That is the practical content of the whole concept, and it is worth stating concretely. Nothing bad happens because a balance went unread; a portfolio does not perform differently according to whether its owner looked. What can happen is that the envelope containing the statement also contained something with a clock on it. A change to a plan's investment lineup or fee schedule, an open enrollment window, an employer's notice about a match formula, a dispute deadline running from a statement date, a rebalancing band that has been breached for months. Each of those is a decision with an expiry, and the ostrich effect is the mechanism by which the expiry passes unnoticed.

It is distinct from three neighbors it gets confused with. Panic selling is acting on a fall; the ostrich effect is declining to look at one, which is in some sense the opposite behavior. Status quo bias is a preference for leaving things as they are once you know the options; the ostrich effect operates a step earlier, at whether to find out the options. And loss aversion describes how a known loss feels relative to an equivalent gain, whereas this is about the choice not to know.

The concept reaches beyond money, and the authors say so. They write that "possible applications of the ostrich effect are much broader than finance," and that "ostrich-like behavior should be observed in any situation in which people are emotionally invested in information and have some ability to shield themselves from it," giving medical testing as their example.

The mechanism, in the paper's own structure, runs in two stages. A person receives preliminary or incomplete news, in the finance case the general direction of the market. They then decide whether to seek out definitive information, in this case their own account balance, which may differ from the market's direction. The authors note that even when the market is down, "it is still possible that the specific stocks they own may have risen," so the decision not to look is a decision made under genuine uncertainty rather than a refusal to face a known fact.

A hypothetical example of what a delay can cost, chosen because it involves no market prediction at all. Priya holds $60,000 in a fund inside a workplace plan. The plan changes the fund's share class and the expense ratio rises from 0.15 percent to 0.65 percent. The notice arrives with her quarterly statement during a stretch when the market is falling, and she does not open any statements for three years.

• At 0.15 percent, the annual cost on $60,000 is $90.
• At 0.65 percent, it is $390.
• The difference is $300 a year, and over three years, about $900.

Nothing in that example depends on what the market did. The fund's returns are whatever they are, and Priya's decision not to look changed none of them. What her three years of not looking cost was three years of an avoidable fee, because the plan offered an alternative share class she never read about. That is the shape of the real cost: not the value she avoided seeing, but the choice she did not know she had.

The countermeasure that follows is mechanical rather than motivational, because the effect is strongest exactly when resolve is weakest. A fixed review date, a rebalancing rule with a written band, and a habit of opening plan notices separately from performance reporting all work by removing the moment of decision. Separating the two is the specific one worth noting: a plan document, a fee change or an enrollment notice contains no performance information at all, so there is nothing in it to flinch from, and it is usually the item with the deadline.

What is well established about it

• It rests on account-login records from two large investor datasets rather than on a laboratory task, which is a stronger evidence base than many behavioral findings have.
• The authors' own model explains the behavior without assuming anyone is irrational, which makes it harder to dismiss and easier to recognize in oneself.
• It has a clean and specific countermeasure, since a scheduled review does not depend on how the market has been doing.
• Not looking during a fall may genuinely reduce the temptation to sell into it, so the behavior is not purely a cost.

The limits and the misreadings

• What was measured is monitoring frequency, not decision quality, so the study does not show that avoidance costs money.
• The finding covers flat markets as well as falling ones, and summaries that describe it as avoiding bad news alone state it too narrowly.
• The coinage is attributed to an earlier paper using the term in a narrower sense, so two definitions circulate under one name.
• Treating any period of not checking as a bias is an overreach. Constant monitoring has costs of its own, and a plan with a scheduled review is not avoidance.