I came up with this concept very early in my career after realizing a lot of people I was meeting with were ignoring their financial life. Turns out I wasn't the first one to think of the concept! In behavioral finance, the Ostrich Effect is an attempt made by investors to avoid negative financial information. And the term? It comes from the common legend that ostriches bury their heads in the sand to avoid danger.
This bias takes its name from the widely held, though completely incorrect, belief that an ostrich will bury its head in the sand when faced with danger. Google it, it's true! As humans, we demonstrate this kind of behavior by blotting out a problem from the mind instead of tackling the situation which threatens us.
Explained briefly, the Ostrich Effect is the tendency to ignore a dangerous or risky situation. Let's call it a lack of logic, meaning: If I can’t see it, it doesn’t exist.
So much of the work I do with clients revolves around the things we know we should do, but we just don't do it. For example, we know we should save money for retirement. Because let's face it, not enough money or no money in retirement is a dangerous situation for most of us.
Now let's borrow the lack of logic example above. Maybe we can't see retirement because it's 20 or 30 years from now. Our lack of logic example tells us it clearly it doesn’t exist. So we go Ostrich and bury our head in the sand, go through life, hope we don't hit any bumps along the way and hope (pray?!) again when we pull our head up, the sun is shining.
Sorry. It just doesn't work that way.
After a decade in this business, I've also learned there's more to the Ostrich Effect than just ignoring it. It's a behavioral thing. Maybe it's pride, maybe shame. Even embarrassment, perhaps. But there's a behavior working against us, and that behavior is keeping us from our best financial selves.
This financial planning stuff, it can be hard, or confusing, or stressful. Especially at first. Quite literally, it's a behavior change not unlike starting a workout regimen or kicking a bad habit. But it can also be very rewarding, stress reducing, even liberating.
The first step is the hardest part. Instead of avoiding/dreading/putting it off, we should jump in and just do it. And that's often easier when we do it with someone else, like having a workout buddy or a personal trainer or a financial advisor. Someone to hold us accountable for the changes we want to make. To quote my friend, Joe, it's simple, but not easy.
So let's recap. Don't ignore the bad things happening. That's the Ostrich Effect. It doesn't make them go away. And understanding the Ostrich Effect will help to ensure you don't ignore the problems you should be tackling. That's the behavior change.
What areas of your financial life are you applying the Ostrich Effect?
Do you apply the Ostrich Effect to other areas of your life?
Is it time to pull your head out of the sand? (see what I did there?)