Running & Investing  :Ostrich Effect

While on a run, have you ever thought if a twinge was just a normal part of running or sign of a looming injury?

Distance running is intrinsically uncomfortable at times, which makes it hard for many runners to discern when they should keep pushing and when it’s time to back off and listen to the body.

As an experienced runner, each new goal means training the body, to cope with more stress.

As a new runner, each new distance, means muscle soreness and stretching our mental resilience.

The ostrich effect is an attempt made by investors to turn blind eye to negative financial information.

The name comes from the myth that ostriches bury their heads in sand to avoid danger.

While investing, the ostrich effect occurs when as an investor you as an individual, is uncertain about future financial situations , but choose to pretend that these situations do not exist.

In one of my interactions with an individual investor, I discovered that 80% of his net worth was in the asset class of real estate. The individual had minimal financial assets and was confident of reaching his goals through one asset class.

Last week, I got a call from the same individual, franetically seeking a buyer to liquidate one of the property as there was an urgent cash flow requirement.

This is a classic case of ostrich behavior i.e. knowingly ignoring future cash flow requirements.

The list of this behavior (pretending that these situations don’t exist) is long;

  • Not having a risk/liability management in place
  • Lack of cash flow planning
  • Banking on ancestral assets for unforeseen events
  • Investing majorly in one asset class

One can mitigate ostrich effect by asking a few questions ( only an indicative list) :

  • Can I take more informed decision by seeking some additional information ?
  • If yes, am I pursuing this additional information, or am I ducking it?
  • If I am ducking this information, then why am I doing so?

If you are knowingly avoiding crucial information because you don’t want to face it, regardless of the fact that it could assist you in taking well informed step, then you are likely being influenced by the ostrich effect.

Though the ostrich effect is generally viewed as something negative, it’s important to remember that it can sometimes be reasonable to avoid negative information, as long as doing so leads to better decision making, or offers some other benefit.

For instance, if you are committed to holding a certain stock across multiple time frames , know that checking its performance constantly will make it more difficult for you to not take knee jerk reaction.

In such times limit your exposure to information about the stock. This might help you remain detached from external noises and calm your nerves.

There are several ways to deal with this issue.

The simplest option is to actively push yourself to deal with this information, now that you recognize the fact that you have been avoiding it, and understand why you did that.

Overall, the important thing is that if you do choose to selectively avoid information, then you should make that choice in a conscious and rational manner.

One needs to hold on to the belief that this action will be good for you, rather than the fact that you are afraid of having to face with the news , that you don’t want to hear.

Content : Ajit Kaushal