Ostrich Effect

In behavioral finance, the ostrich effect is the avoidance of apparently risky financial situations by pretending they do not exist. The name comes from the common (but false) legend that ostriches bury their heads in the sand to avoid danger.

Galai and Sade (2006) explain differences in returns in the fixed income market by using a psychological explanation, which they name the “ostrich effect,” attributing this anomalous behavior to an aversion to receiving information on potential interim losses. They also provide evidence that the entrance to a leading financial portal in Israel is positively related to the equity market.

Later, research by George Loewenstein and Duane Seppi determined that people in Scandinavia looked up the value of their investments 50% to 80% less often during bad markets.

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