The ostrich effect: Selective attention to information

Abstract

We develop and test a model which links information acquisition decisions to the hedonic utility of information. Acquiring and attending to information increases the psychological impact of information (an impact effect), increases the speed of adjustment for a utility reference-point (a reference-point updating effect), and affects the degree of risk aversion towards randomness in news (a risk aversion effect). Given plausible parameter values, the model predicts asymmetric preferences for the timing of resolution of uncertainty: Individuals should monitor and attend to information more actively given preliminary good news but “put their heads in the sand” by avoiding additional information given adverse prior news. We test for such an “ostrich effect” in a finance context, examining the account monitoring behavior of Scandinavian and American investors in two datasets. In both datasets, investors monitor their portfolios more frequently in rising markets than when markets are flat or falling.

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Notes

  1. 1.

    The idea that ostriches hide their head in the sand is a myth. According to the Canadian Museum of Nature (http://www.nature.ca/notebooks/english/ostrich.htm): “If threatened while sitting on the nest, which is simply a cavity scooped in the earth, the hen presses her long neck flat along the ground, blending with the background. Ostriches, contrary to popular belief, do not bury their heads in the sand.”

  2. 2.

    Benabou and Tirole (2006); Bodner and Prelec (2001); Geanakoplos, Pearce and Stacchetti (1989); and Rabin (1993) provide other examples of how information-dependent utility changes people’s behavior.

  3. 3.

    In Akerlof and Dickens (1982), workers in dangerous work environments downplay the severity of unavoidable risks. In Köszegi (1999), Bodner and Prelec (2001), and Benabou and Tirole (2006), people take actions to persuade themselves, as well as others, that they have desirable personal characteristics that they may not have. In Benabou and Tirole (2002), people exaggerate their likelihood of succeeding at a task to counteract inertia-inducing effects of hyperbolic time discounting. In Brunnermeier and Parker (2002) and Loewenstein (1985, chapter 3), agents maximize total well-being by balancing the benefits of holding optimistic beliefs and the costs of basing actions on distorted expectations. In Rabin and Shrag (1999), people interpret evidence in a biased fashion that responds more strongly to information consistent with what they are motivated to believe.

  4. 4.

    Our intuition a priori is that investors are more likely to monitor their portfolios when the market is neutral than when it is sharply down. As will be evident in the following section, the data provide mixed support for this prediction. The prior analysis may seem to be at odds with this intuition since the model says that people will never monitor their portfolios when the market is flat but that, for some parameter values, investors will monitor when the market news is negative. However, the magnitude of the disincentive for attention can be greater when the market is down than when it is flat if α is large and θ is close to 0.

  5. 5.

    If r 2 is an independently distributed, mean-zero shock that is realized and automatically learned at date 2, then the attention differential is \(\Delta J\left( p \right) = \left( {1 + \alpha } \right){\text{E}}\left[ {u\left( {p + r_{\text{d}} } \right)} \right] + {\text{E}}\left[ {u\left( {r_2 } \right)} \right] - \left[ {u\left( p \right) + {\text{E}}\left[ {u\left( {\theta p + r_{\text{d}} + r_2 } \right)} \right]} \right]\). In this case, \({\text{E}}\left[ {u\left( {p + r_{\text{d}} } \right)} \right] <u\left( p \right)\) and \({\text{E}}{\left[ {u{\left( {r_{2} } \right)}} \right]} > {\text{E}}{\left[ {u{\left( {r_{{\text{d}}} + r_{2} } \right)}} \right]}\) where the later inequality follows because r 2 second-order stochastic dominates r d + r 2.

  6. 6.

    Although LOOKUPS t is defined as the number of logins less the number of portfolio rebalancing transactions, there may be look-ups motivated by a potential interest in trading which did not ultimately result in trades.

  7. 7.

    If ex ante utility forecasts are erroneous (see Loewenstein, O’Donoghue and Rabin 2003), then the ostrich effect could cause investors to pay attention too little or too much.

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Acknowledgments

We thank the Swedish Foundation for International Cooperation in Research and Higher Education (STINT) and the Bank of Sweden Tercentenary Foundation (grant K2001-0306) for supporting Karlsson and Loewenstein’s collaboration, Bjorn Andenas of the DnB Norway group, SEB, and the Swedish Premium Pension Fund for providing data. We are very grateful to Daniel McDonald for able research assistance. We thank Kip Viscusi (editor), two anonymous referees, and also On Amir, Nick Barberis, Roland Benabou, Stefano DellaVigna, John Griffin, Gur Huberman, John Leahy, Robert Shiller, Peter Thompson, Jason Zweig and seminar participants at the 2004 Yale International Center for Finance Behavioral Science Conference and at Case Western University for comments and suggestions.

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Correspondence to George Loewenstein.

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Karlsson, N., Loewenstein, G. & Seppi, D. The ostrich effect: Selective attention to information. J Risk Uncertain 38, 95–115 (2009). https://doi.org/10.1007/s11166-009-9060-6

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Keywords

  • Selective exposure
  • Attention
  • Investor behavior

JEL

  • D81
  • D83