Could You Be a Victim of the Ostrich Effect?

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Ostrich EffectWhen an ostrich feels scared, the imposing bird buries its head in the sand. The (lack of) logic, presumably: “If I can’t see it, it doesn’t exist.”

Silly, right?

Maybe it isn’t as ridiculous as it sounds, considering that humans do it, too. While we simply don’t have the neck length to literally stick our heads in the sand, Hebrew University researchers Dan Galai and Dr. Orly Sade observed that people often deliberately look away from money problems–specifically, investing problems related to market fluctuations.

In a paper that they co-wrote, Galai and Dr. Sade have coined this the “Ostrich Effect.”

“The Ostrich Effect consists of two components,” explains Dr. Sade. “The first is the tendency of individuals to avoid unpleasant information, such as reading less negative financial news, and checking their savings accounts less often. The second is the effect that such behavior has on prices and activity in the financial markets.”

Of course, we’re not blaming anyone here–we know that money issues can be stressful and complex.

Case in point: These three common money stressors could inspire your very own version of the Ostrich Effect. But the good news is that you can tackle them … head on.

1. Steep Credit Card Statements

Opening a budget-busting monthly credit card statement can be both anxiety-provoking and stressful. Whether your payment is unusually high due to a recent vacation or a spontaneous purchase, it’s no surprise that we might have the urge to ignore the bill, pay the minimum and hope it will be better next month.

Although the study authors didn’t specifically investigate the impact of the Ostrich Effect on credit card statements or bills, Dr. Sade tells us that “being an ‘Ostrich’” obviously won’t make the problems disappear. To the contrary, she says, “The ignorance may lead to the further deterioration of a person’s total financial situation, such as an additional reduction in the individual’s credit score, which could have a long-term effect.”

How to Face It: Brittney Castro, Certified Financial Planner (CFP®) and CEO of Financially Wise Women, advises people to master their cash flow. “Start by calculating your monthly net income (after-tax) and your monthly expenses,” she says. “Then, at the end of every month, review your total income and expenses to ensure that you’re not overspending and falling into credit card debt.”

One easy way to prevent credit card statement anxiety: Link your accounts to a tool like the Money Center, where you’ll be able to monitor your spending as it happens on a daily basis–instead of being surprised by your bill.

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  • Shelley

    It also translates to stock market investing.  When people don’t have their exit strategy set from the start or are remaining unaware of risk change states to their stock or etf holdings, they are sticking their head in the sand.  Indeed, people stop opening their brokerage or 401k statements as was displayed in periods like 2008.    We need to re-educate the public as to the importance of risk management in their investments.  Studies has proven that just missing the worst days of the markets can increase one’s returns tremendously.  Read more at:  http://smartstops.wordpress.com/

  • Deneen

    Only bad thing about this article is that it is a myth that ostriches bury their heads in the sand….check it out on National Geographic.