Could You Be a Victim of the Ostrich Effect?

Could You Be a Victim of the Ostrich Effect?

When 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.

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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.

2. Tax Preparation Time

It's never too early to get started on your taxes, even if you missed our end-of-year tax gifts to give yourself. But the Ostrich Effect can tempt us to tackle those piles of receipts and forms at the last minute, leaving us scrambling to get it together at the beginning of April.

When you push off tax preparation, you run the risk of not having enough money to cover the bill, as well as missing opportunities to contribute to your retirement accounts. You're also more prone to make careless mistakes on your return--ones that could result in costly penalties.

How to Face It: Sophia Bera, Certified Financial Planner (CFP®) with LearnVest Planning, advises clients to buy an accordion binder for tax-related items. If you use an accountant, see if he can suggest any other tools to help you organize your forms throughout the year. "Then," she says, "gather all of those documents into one spot, so that you're really prepared when you sit down to do your taxes.”

3. Overdue Bill Notices

Let's say that you accidentally missed a utility bill payment or you couldn’t make your last car payment. It can be tempting to "not get" notices by mail or "not be at home" when creditors call looking for that money, but hiding your head in the metaphorical sand can do real harm to your finances (and your psyche).

How to Face It: Accidents happen. In this situation, you can use one of two solutions: If you have the money, pay the bill immediately. If you don't have the money, call the creditor. It sounds intimidating, but people are much more inclined to be generous when they know you're trying to make a situation right, rather than ducking their calls and pretending that you've moved to Azerbaijan. "If this is the first time that this has happened," says our trusty financial planner Sophia, "you may be able to call the creditor and get the late fee waived."

Ask if you can set up a payment plan to settle the balance over the next few weeks or months (and then make sure to set aside that money in your budget) or set up automatic bill payments for standard charges, such as rent.

It doesn't really matter which strategies you use to face your financial problems--as long as you get your head out of the sand.

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