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Rotman Insights Hub | University of Toronto - Rotman School of Management

Bad news or no news? When losses are certain, investors opt to ignore their account

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Matthew Hilchey, Renante Rondina, Dilip Soman

Prior research from economist George Loewenstein shows that investors check the value of their portfolios more often when markets are rising but will “put their heads in the sand” when markets are flat or falling.

Loewenstein presumed that this so-called “ostrich effect” was because investors didn’t want to feel bad about their losses. But Rotman post-doctoral researcher Matthew Hilchey thought selective checking habits go beyond wanting to feel good or avoiding feeling bad. He posited that it could be due to the utility of that information – or lack-thereof.

“There’s a lot you can do with money if you make it, but you can’t do much with money that you don't have,” explains Hilchey, who is a cognitive psychologist by training. “The [ostrich effect] is most likely to manifest itself when information is most useless.”

Alongside researchers Renante Rondina and Rotman professor Dilip Soman, Hilchey tested this theory in their 2022 study “Information-seeking when information doesn't matter.”

The trio designed an experiment to test how frequently participants sought out information about the results of a lottery when that information had no impact on their eventual payout. They suspected that people would be more likely to check for results when told that they would be winning and less likely to check when told that they’d be losing.

Those who knew they could win checked their results 67 per cent of the time as compared to just 57 per cent of the time when they knew they could lose. Ultimately, the findings confirmed Hilchey’s suspicions: When results were known to be positive, people checked to confirm what they already know. When losses were assured, people chose to ignore the information.

These results can have real-world implications beyond simple win/loss scenarios. For example, consumers who know they’ve fallen deeper into credit card debt may be less likely to confirm their suspicions. “If you’re not logging in to check your credit card balances, it’s possible that you won’t pay off the balance before it’s due,” says Hilchey. “You can incur relatively significant interest charges and that becomes a self-perpetuating cycle.”

Rondina, Soman and Hilchey also tested a theory that making bad news easier to find would increase the chances that people would check for information about it. While the original experiment had participants click between one and four gray squares to reveal a result, a second experiment increased the difficulty of finding information by presenting participants with 16 gray squares to click through — one of which would reveal the result of the lottery.

Hilchey expected that the difference in rates for checking when winning versus losing the lottery would increase — winners would still be motivated to check, despite it taking longer to click through up to 16 gray squares, while losers would be even more discouraged and unlikely to check. But researchers were surprised to find out that the difference in checking was the same when it became more difficult — 43 per cent of known winners checked all the squares while 33 per cent of known losers checked. The difference of 10 percentage points remained, regardless of whether checking was made easier (one gray square to click through) or more difficult (16 gray squares to click through). Ultimately, making things easier didn’t alleviate the ostrich effect. A third experiment tested the likelihood of checking when participants weren’t sure if they would win or lose. “When there's uncertainty, perhaps unsurprisingly, people want to find out their outcomes more often,” Hilchey says. “When there’s certainty, the magnitude of the ostrich effect gets bigger. So that preference people have to confirm good over bad news gets bigger.”

Understanding more about the ostrich effect can help banks and governments create better policies and systems for people in financial trouble. As of June 30, 2022, new Canadian regulations require banks to send alerts to customers when their chequing or savings account is low on funds, and when approaching their credit limit. But if making information about losses easier to find doesn’t help, Hilchey’s research suggests that regulators need to do more for those in financial trouble. “To get people to 'unbury their head out of the sand', successful interventions will likely have to go beyond making it easier for people to find out their results,” he says.

Instead, Hilchey suggests offering choices that people can make to improve their financial situation would encourage them to check accounts more often and take action on growing debts or lowering balances. He’s currently studying this theory in a follow-up experiment where participants can take corrective action to reduce or eliminate future losses. So far, his results suggest that those presented with options to mitigate losses are more likely to seek out information about the loss.

Hilchey recommends creating courses of action for both win and loss scenarios. “Have negative financial contingency plans,” he says. “Assume that the worst can happen and have a plan for dealing with it.”

He also believes that financial regulators can go a step further by requiring banks to offer options for customers in debt or with low balances, such as debt consolidation. “People don't think they can do anything about bad news,” Hilchey says. “But if we can make people realize that they have options, there are things they can do when things go sideways, maybe we can correct this kind of problem when it matters.”

Matthew Hilchey is a post doctoral research at the Rotman School of Management.