The Ostrich Meets the Middle Man
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 18
September 2008, 7.50 am and 7.20 pm)
When we fall in love, it’s quite normal to be obsessed
with our loved ones. We will spend hours searching for more
information about our new-found love, and we will discuss
endlessly the finer points of our loved one with
Investors are no different. When stock markets are up,
investors will search for more information about their
new-found wealth. They will discuss the merits of the stock
endlessly with their friends. And they will seek out
information to support their beliefs that a certain price
target will be achieved.
This is to be expected. Studies in psychology have
found that people unconsciously seek out information that
reinforces their own beliefs. This is the “selective exposure”
For instance, new car owners will pay more attention
to the advertisements of the cars they have bought, rather than
those they did not buy. Likewise, smokers will pay more
attention to articles that support smoking, and ignore articles
that demonstrate the health hazards of smoking.
But what is the reaction of investors when their
stocks do not go up as expected? Likewise, what happens when
the loved one we marry turns out to be the wrong choice, and we
find ourselves trapped in a failed marriage?
The evidence tells us that even though couples in a
failed marriage may continue to live in the same house, both
will completely ignore the other. They will live separate
lives. Investors are no different. When their stocks are down,
they also ignore them.
This reaction has been supported in studies conducted
by behavioral economist George Lowenstein of the Carnegie
Mellon University. He found that in a bull market, investors
check their portfolios frequently. But in a bear market,
investors looked at their portfolios about 50% to 80% less
Of course, when stock prices first come down,
investors will seek out information to explain the losses. But
up to a point. Beyond that point, they will ignore additional
bad news and lose interest in their investment portfolios
Lowenstein calls this the “ostrich effect”. It
describes the self-denial behaviour of investors, which is
sticking their heads in the sand, when their investment
portfolios turn bad.
The explanation is that investors do not want to know
that they have lost money by checking the latest prices. It is
certainly less painful than to know exactly how much they have
lost. This way, investors can always retain the hope that their
investment portfolios somehow did better.
This “ostrich effect” stems from the observation that
almost all investors are emotional about their investments.
When they do eventually look at their portfolios, it would be
when they are forced to, like when they need the money, or when
there’s a margin call.
But by then, it would be too late. The losses would be
substantial. To avoid this disaster from happening to you,
perhaps the best solution is to put your money in reputable
unit trusts or with investment managers.
Granted, these investment managers take too much in
commissions and upfront charges. But at least they will look at
your portfolios regularly. As the middle man, they are less
emotional about investments and they will switch to other
assets when you are most unlikely to.
If you are one of those who rushed into, or were
encouraged to rush into unit trusts investing in China early
this year, your losses should be around 50%.
But if you had picked your own stocks, the chances are
that you will keep holding on to your losing stocks. Like the
mythical ostrich burying its head in the sand, you will ignore
all bad news this year. In the end, your losses would probably
be closer to 80%.
This ostrich behaviour of most investors suggests that
the services of an investment manager are a necessary evil. At
least, investors have a middle man who manages and gives them
regular news updates about their portfolios.
The spouses in a failed marriage cannot enjoy the
services of such a middle man. They have no choice but to
depend on their children for regular news updates about the
other spouse. In the absence of children, it has to be the