"Long before it's in the papers"
December 18, 2015


Study: investors often deal with portfolio slumps by just looking away

Dec. 18, 2015
Courtesy of Carnegie Mellon University
and World Science staff

Far from be­ing robot-like an­a­lysts who reg­u­larly re­view their port­fo­lios, a large frac­tion of in­vestors deal with ex­pected slumps in their hold­ings by just not look­ing, a study finds.

This “os­trich ef­fect” ap­plies even in an era of 24/7 ac­cess to fi­nan­cial da­ta: un­lucky in­vestors stop log­ging in­to their on­line ac­counts as of­ten, ac­cord­ing to the economists be­hind the stu­dy. This ten­den­cy may af­fect mar­ket prices of in­vest­ments, they add.

Study col­la­bo­ra­tors George Loewen­stein and Du­ane Seppi, at Car­ne­gie Mel­lon Un­ivers­ity in Pitts­burgh, Penn., in­tro­duced the “os­trich ef­fect” con­cept in 2009 to de­scribe how in­vestors “put their heads in the sand” to dodge fac­ing their fi­nan­cial port­fo­lios when they’re ex­pect­ing bad news. 

The new study con­cludes that os­trich be­hav­ior is widely prev­a­lent and is a sta­ble per­son­al­ity trait in in­di­vid­ual in­vestors. Ac­cept­ed for pub­lica­t­ion in the jour­nal Re­view of Fi­nan­cial Stud­ies, it’s billed as the first large-scale in­ves­ti­ga­t­ion in­to when in­vestors log in to check their port­fo­lios and how lo­gins af­fect trad­ing ac­ti­vity.

“This is the adult ver­sion of shak­ing the pig­gy bank,” said Loewen­stein. “It shows that in­vesting is much more than cold cal­cula­t­ions about how to max­im­ize re­sources when you re­tire. Short-term fluctua­t­ions in port­fo­li­o val­ues are an im­por­tant source of im­me­di­ate pleas­ure and pain for in­vestors.”

The os­trich ef­fect is­n’t al­ways a bad thing, he added. Some­times in­vestors have to en­dure short-term pain for long-term gain. So “not log­ging in when the news is likely to be bad is one strat­e­gy that in­vestors use to min­i­mize the pain while tak­ing ben­e­fi­cial risks.”

How­ev­er, “Si­m­i­lar pat­terns of at­ten­tion may al­so arise in oth­er con­texts,” where they’re less be­nign, said Na­chum Sicher­man of Co­lum­bia Busi­ness School in New York, a co-author of the stu­dy. Take “health­care, where stick­ing your head in the sand and ig­nor­ing neg­a­tive sig­nals may ac­tu­ally be dan­ger­ous.”

The in­vestment study ex­am­ined how and when in­vestors pay at­ten­tion to their port­fo­lios us­ing a da­ta set of over 852 mil­lion ob­serva­t­ions on day-to-day lo­gins and trades for 1.1 mil­lion in­vestors over two years. The re­search­ers said they found strong ev­i­dence that in­vestors show an os­trich pat­tern. For ex­am­ple, ac­count lo­gins fell by 9.5 per­cent af­ter a de­cline in the pre­vi­ous day’s stock mar­ket.

“With in­vestment de­ci­sions grav­i­tat­ing to the dig­it­al world, fi­nan­cial at­ten­tion, wheth­er to good or bad news, be­comes a fun­da­men­tal force that ad­vis­ers, plan spon­sors and fi­nan­cial ser­vic­es providers must grap­ple with,” said Ste­phen Utkus, anoth­er co-author with the Van­guard Group, a Mal­vern, Penn.-based in­vestment man­age­ment com­pa­ny.

In­vestors al­so paid less at­ten­tion when the stock mar­ket was ex­pected to be vol­a­tile, the study found. Men were more likely to ex­hib­it os­trich be­hav­ior, as well as old­er in­vestors. Per­haps most im­por­tantly, in­vestors with great­er port­fo­li­o balances—in­vestors with more at stake—were more likely to look se­lec­tively when mar­kets were up.

“At­ten­tion mat­ters, not only be­cause of its ef­fect on trad­ing, but al­so be­cause ag­gre­gate in­vestor at­ten­tion be­hav­ior can af­fect how dif­fer­ent se­cur­i­ties are priced,” said Seppi. “For ex­am­ple, our re­sults sug­gest that in­vestors not only care about the streams of ex­pected fu­ture cash flows from stocks and bonds, but al­so streams of fu­ture in­forma­t­ion.”

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Far from being robot-like analysts who regularly review their portfolios, a large fraction of investors deal with expected slumps in their holdings by just not looking, a study finds. This “ostrich effect” applies even in an era of 24/7 access to financial data: suffering investors simply stop logging into their online accounts as often, according to the economists behind the study. This tendency may affect market prices of investments, they add. Study collaborators George Loewenstein and Duane Seppi, at Carnegie Mellon University in Pittsburgh, Penn., introduced the “ostrich effect” concept in 2009 to describe how investors “put their heads in the sand” to dodge facing their financial portfolios when they’re expecting bad news. The new study concludes that ostrich behavior is widely prevalent and is a stable personality trait in individual investors. Accepted for publication in the journal Review of Financial Studies, it’s billed as the first large-scale investigation into when investors log in to check their portfolios and how logins affect trading activity. “This is the adult version of shaking the piggy bank,” said Loewenstein. “It shows that investing is much more than cold calculations about how to maximize resources when you retire. Short-term fluctuations in portfolio values are an important source of immediate pleasure and pain for investors.” The ostrich effect isn’t always a bad thing, he added. Sometimes investors have to endure short-term pain for long-term gain. So “not logging in when the news is likely to be bad is one strategy that investors use to minimize the pain while taking beneficial risks.” However, “Similar patterns of attention may also arise in other contexts,” where they’re less benign, said Nachum Sicherman of Columbia Business School in New York, a co-author of the study. Take “healthcare, where sticking your head in the sand and ignoring negative signals may actually be dangerous.” The investment study examined how and when investors pay attention to their portfolios using a data set of over 852 million observations on day-to-day logins and trades for 1.1 million investors over two years. The researchers said they found strong evidence that investors show an ostrich pattern. For example, account logins fell by 9.5 percent after a decline in the previous day’s stock market. “With investment decisions gravitating to the digital world, financial attention, whether to good or bad news, becomes a fundamental force that advisers, plan sponsors and financial services providers must grapple with,” said Stephen Utkus, another co-author with the Vanguard Group, a Malvern, Penn.-based investment management company. Investors also paid less attention when the stock market was expected to be volatile, the study found. Men were more likely to exhibit ostrich behavior, as well as older investors, and, perhaps most importantly, investors with greater portfolio balances—investors with more at stake—were more likely to look selectively when markets were up. “Attention matters, not only because of its effect on trading, but also because aggregate investor attention behavior can affect how different securities are priced,” said Seppi. “For example, our results suggest that investors not only care about the streams of expected future cash flows from stocks and bonds, but also streams of future information.”