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Imagine yourself as a casual investor when the stock market takes a turn that could potentially impact your investments. You usually have two options: check what impact the market has had on you, or ignore the threat and stick it out.
If you choose to ignore the news and hope the market course corrects, you aren’t alone. But you might not be making the best decision, either. This behavior is known as the “ostrich effect,” a phrase used in several studies to describe the act of ignoring potentially bad news and hoping you won’t be affected, instead of accepting reality and potential consequences. If you’ve ever gotten an ATM receipt and declined to check your balance, you might know the feeling.
Unfortunately, behaving like an ostrich, with your head in the sand, may impact your financial habits, too. Here is what you should know about the ostrich effect and the steps you can take to potentially avoid its negative consequences.
The ostrich effect in action
This effect has been documented in several studies, first in 2003 by Dan Galai and Orly Sade, from the Hebrew University of Jerusalem, and again in 2009 by Niklas Karlsson, George Loewenstein, and Duane Seppi, at Carnegie Mellon University. The latter study showed how both Scandinavian investors and investors with certain Vanguard portfolios tended to check on the value of their accounts much less often in a weak economy.
During periods of strong market performance, investors tended to pay more attention to their holdings. On the contrary, if they suspected news would be bad, they preferred not to hear it. Even if you don’t have investments, you might recognize this behavior in yourself and understand that the repercussions might be harmful to you and your finances.
Understand your finances—in good times and in bad
Consider the ostrich effect of ignoring your finances, especially in bad times. With accounts at financial institutions, if you inadvertently overdraw your balance or miss fraudulent charges, it may result in overdraft fees or lost money. When it comes to investments, ignoring market changes might not be harmful over a long period of time, but this isn’t always the case.
Ignoring your investments during turbulent times may limit your financial decision-making options, as well as significant, overall life decisions. Not only that, but this behavior could also affect your family and loved ones.
Paying closer attention to all of your finances may help you stay on track with your goals, cut out bad habits, or limit your spending. You don’t have to change your strategies or plan during a down market, but paying more attention during volatile economic times at least gives you the option to do so.
Avoid the sand
As a general rule of thumb: Try not to ignore your finances. Whether it’s not checking your balances or not opening your statements, stop and ask yourself why you’re doing this. Recognize that just because you might think the news will be negative, doesn’t mean it will be. And, even if it is, once you know the reality, you can consider taking concrete steps to improve it.
Dealing with debt may sometimes make you feel powerless, but the ability to make changes is what gives you control. Take charge of your finances and, if necessary, seek help from a financial professional. The more you know about your money, the more prepared you’ll be to handle it responsibly and positively.
Dustin Pellegrini is a senior web producer and writer at Think Glink Media, where he specializes in reporting on identity protection and credit. He studied writing and visual media at Columbia College Chicago.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
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