Image Credit: Heath Hinegardner
By Jason Zweig | Sept. 13, 2008 11:59 p.m. ET
In a stock market that never seems to run out of reasons to go down, you no longer feel like a bull. But that does not necessarily make you a bear. You may, in fact, have become an ostrich.
Chances are, you didn’t leap for the letter opener the last time your investment-account statement came in the mail. Nor have you been looking up the value of your portfolio online anywhere near as frequently as you did in the glory days of the summer of 2007. Can you even peg, within a hundred points, where the Dow closed on Friday?
Behavioral economist George Loewenstein of Carnegie Mellon University coined the term “the ostrich effect” to describe the way investors stick their heads in the sand during lousy markets.
“Knowing definitively that something bad has happened is much more painful than suspecting that something bad may have happened,” he explains. “If you don’t know for sure how your portfolio did, you can always retain the hope that it somehow did better.”
In standard economic theory, investors care about their total wealth, not how much they gain or lose from moment to moment. But investors are people, not adding machines. They still want to capture pleasure and avoid pain.
Turning yourself into an ostrich doesn’t make your losses go away, but it does enable you to pretend they aren’t there.
New research by Prof. Loewenstein and his colleague Duane Seppi found that investors in Scandinavia looked up the value of their holdings 50% to 80% less often during bad markets. American investors stuff their heads in the sand, too. Vanguard mutual-fund holders checked their account values far less often in this June’s grim market than they did in mid-to-late 2007, when stocks were setting new highs (see chart).
Acting like a 200-pound bird with a two-ounce brain isn’t all bad. Yes, if it’s been six months since you last checked the value of your shares in Fannie Mae or Washington Mutual or Lehman Brothers, then you will feel like a birdbrain when you finally get an update. But such black-hole stocks are rare. If you sell on every bit of bad news, you will never get to profit from the far more common good news.
Experiments by psychologist Paul Andreassen have shown that the more news that investors get on their holdings, the more they trade and the lower the returns they earn. When your head is stuck in the sand, you can’t open your mouth to trade.
But becoming completely information-averse isn’t a good idea, either. Here are some prudent actions you can take when you would rather act like an ostrich.
Look ahead. Use your email or calendar software to send yourself a future reminder. Commit yourself to check the value of your accounts, not today, but one week or one month from now. When that day arrives, rebalance your portfolio, selling a portion of those assets that have gone up and buying a bit of those that have gone down. Also check whether you hold any stocks that you would not buy more of at their latest prices; sell them for a loss that you may use to reduce your taxable income.
Use the news. You should not, of course, stop reading this estimable newspaper. For an intelligent investor looking for timely buy ideas, the New Highs and Lows table in the Money & Investing section is alone worth the price of the paper; this Thursday, it offered a bumper crop of 656 new lows.
Be contrary. When the headlines are overwhelmingly negative, as they are now, the market tends to feel riskier than it actually is. (The time to worry is when no one seems worried, not when everyone does.) Take a few moments to go back in market history and see how stocks did after other periods of despondency like 2002, 1998, 1991, 1987, 1982, 1974 and so on. If history is any guide, your inclination to act like an ostrich is a strong indication that the market is about to turn into a phoenix.
Source: The Wall Street Journal, https://www.wsj.com/articles/SB122125886256030143
Resources:
Definitions of LONG-TERM, NEWS, SHORT-TERM in The Devil’s Financial Dictionary
Research by George Loewenstein and colleagues on the ostrich effect
Research by Paul B. Andreassen