Who are you in a crisis?

Close your eyes and imagine an ostrich. One of two images will most likely come to your mind- either an ostrich running (they are known for their speed after all) or an ostrich with its head buried in the sand. Interestingly when I was doing research for this article, I found out that the idea that ostriches stick their head in the sand to avoid predators is a myth. It seems ostriches stick their heads in the ground to dig a shallow hole, where they can subsequently make their nests. They do not do it to hide or when they are scared. This makes a lot of sense since they would suffocate if they did indeed bury their heads!

Nevertheless, the idea is so prevalent that it even earned its own term- “The Ostrich Effect” which refers to the idea that some people metaphorically bury their heads in the sand to ignore or avoid negative news when facing a crisis.

In behavioral finance, the ostrich effect describes a situation where investors avoid negative financial information. When markets are facing downturns like we are seeing now, the ostrich effect would predict that most of us will check on our investments less frequently. We have an idea of how bad things are, so why put ourselves through the pain of checking?

However, there are some investors who display the opposite behavior. When faced with a crisis, such as a market crash, some investors become hypervigilant- obsessively looking for news and information. This is known as “The Meerkat Effect”. If you know what a meerkat is, I am sure the image of a group of meerkats stretched up on their hind legs noses in the air, sniffing for danger immediately comes to mind, and so you understand the origin of this term.

Being an over-informed meerkat can do us more harm than good. Checking our investments with hyper-vigilant frequency can distort our investment choices and cause us to make poor decisions. Another effect it can have, is on our mental health. Consuming too much of the information that surrounds a crisis can breed unhelpful anxiety and emotional contagion.

But on the other hand, being an under-informed ostrich, while having its benefits, certainly carries its own set of risks. Not monitoring our finances like normal can lead to the avoidance of necessary, albeit difficult, financial decisions- such as rebalancing our portfolio or exiting an investment before it defaults. It also means missing out on the opportunities that crises can bring about.

Crises reveal stark differences in our psychology. Are you an ostrich? Are you a meerkat? Or do you fall somewhere in between? As we confront our latest global crisis, it’s worth giving this some thought. Ideally, you should want to be somewhere in the middle on what I call the ostrich-meerkat spectrum so that we have a more balanced approach to information during a crisis.

Among the blur of noise or blissful silence, how does an ostrich or meerkat find this balance? Next week we will provide some useful tips on finding the middle ground as this has never been more important.

Toni-Ann Neita-Elliott, CFP is the Vice President, Sales & Marketing at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm   

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