And new data has suggested that ostrich behaviour is still prevalent, even with today’s around-the-clock access to financial information, and is a stable personality characteristic in individual investors.
Forthcoming in the “Review of Financial Studies,” the study by Loewenstein and Seppi, as well as Columbia Business School’s Nachum Sicherman and Stephen Utkus at Vanguard, is the first large-scale investigation into when investors log in to check their portfolios and how logins affect trading activity.
“This is the adult version of shaking the piggy bank,” said Loewenstein. “It shows that investing is much more than cold calculations about how to maximise resources when you retire. Short-term fluctuations in portfolio values are an important source of immediate pleasure and pain for investors. Not logging in when the news is likely to be bad is one strategy that investors use to minimise the pain while taking beneficial risks.”
The four examined how and when investors pay attention to their financial portfolios using a large data set of over 852m observations on day-to-day logins and trades for 1.1m investors over two years. The researchers found strong evidence that investors exhibit an ostrich pattern in attending to their portfolios. For example, account logins fell by 9.5 per cent after a decline in the previous day’s stock market.
“With investment decisions gravitating to the digital world, financial attention, whether to good or bad news, becomes a fundamental force that advisers, plan sponsors and financial services providers must grapple with,” Utkus said.
Investors also paid less attention when the VIX index indicated that future stock market volatility was expected to be high. Men were more likely to exhibit ostrich behaviour, as well as older investors, and, perhaps most importantly, investors with greater portfolio balances.
“Attention matters, not only because of its effect on trading, but also because aggregate investor attention behaviour can affect how different securities are priced,” said Seppi “For example, our results suggest that investors not only care about the streams of expected future cash flows from stocks and bonds, but also streams of future information.”
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