NEW YORK – Even with 24/7 access to financial data, investors avoid looking at their financial portfolios when markets are down, according to new research from Columbia Business School. This "ostrich effect" – when investors stick their heads in the sand and ignore their financial holdings – is most prevalent with men, older investors, and wealthier investors.
"The world is divided between those who look away at bad news and those who stare directly at it. When it comes to your financial portfolio, our findings show that most tend to tuck their heads in the sand when expecting bad financial news," says Nachum Sicherman, co-author of the study and a professor at Columbia Business School. "The idea of who pays attention to their financial portfolios – and when – has the potential to lead to a richer understanding of human behavior toward financial markets."
This new research is the first large-scale investigation of when investors check their portfolios, and of how checking-in affects trading activity. The study, which examined the day-to-day logins and trades of 1.1 million investors with 24/7 access, showed:Account logins fall by 9.5% after market declines. Investors pay less attention when the VIX volatility index is high. Men, older investors, and wealthier investors are more likely to behave as "ostriches." Investors displaying "ostrich" behavior are less likely to trade following market downturns. Attention increases when news media reports on the stock market. The study reveals that while "ostrich: behavior deprives investors of some financial information in the short term, it may actually be beneficial since it helps them avoid trading mistakes, such as overreacting to market downturns. The results of this research will be valuable for investment advisors to understand how investors react to financial information.
The research by Professor Sicherman at Columbia Business School, and his co-authors George Loewenstein and Duane Seppi at Carnegie Mellon University, and Stephen Utkus at Vanguard, found that the level of attention, the attention/return correlation, and the "ostrich" behavior are all strongly related to investor demographics (gender, age) and financial position (wealth, holdings).
"Short term fluctuations in one’s portfolio’s value are an important source of pleasure and pain for investors," says Loewenstein. "Not looking when the news is likely bad is one strategy that investors use to minimize the pain while taking beneficial risks."
Sicherman notes, "Similar patterns of attention may also arise in other contexts, such as healthcare, where sticking your head in the sand and ignoring negative signals may actually be dangerous."
To learn more about cutting-edge research being performed by Columbia Business School, please visit www.gsb.columbia.edu.
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