There is a myth about ostriches that says that they bury their heads in the sand in order to avoid a difficult or uncomfortable reality in front of them. The truth of the matter is that they don’t do this, though female ostriches do stick their head into holes that they’ve dug in order to check if their eggs are ok and to turn them around. Regardless, it has been a long held belief that ostriches shy away from negative beliefs, with humans doing the same.
The idea of the ostrich effect in humans comes from the world of behavioural finance and is a reference to when investors try to avoid negative financial information. When it comes to gambling, it is not unusual for punters to ignore information that doesn’t support the bet or move that they’re planning to make, instead focussing only on the positives. In this way, gamblers are just as guilty of ‘being an ostrich’ as financial investors.
Where The Theory Comes From
In 2006, two professors of finance named Orly Sade and Dan Galai connected the term the ostrich effect with investors who chose to avoid any risk of financial situations by pretending that they didn’t exist. They looked at the fixed income market in Israel, discovering that liquid government bonds tended to have higher yields than illiquid commercial bank bonds.
Because bonds with higher yields were considered riskier investments, they are considered to have higher value than their illiquid counterparts. This discovery surprised the professors who felt that it ran contrary to establish wisdom in the financial world. Liquid assets are ones that are easy to buy and sell. Illiquid assets are those that less people want to buy such as an antique, making them harder to buy and sell.
The professors wanted to find out why this was happening and they discovered that when the financial times were turbulent, investors would look to pay a premium for assets they didn’t have much control over. They realised that if they invested in illiquid bonds, they wouldn’t have to be concerned with the value shifting up or down. They could, in simple terms, simply just ignore their investments.
In 2009 Niklas Karlsson and George Lowenstein expanded the definition of the ostrich effect. They realised that some investors would avoid looking for any financial information that might give them psychological discomfort. To put it another way, if the markets were uncertain then many people would simply avoid financial news that might present them with negative information.
The Ostrich Effect At Work
There are numerous examples from every day life of the ostrich effect at work. A perfect example would be somebody who knows that they spend too much money, so they simply avoid looking at the bank statement and pretend that it doesn’t exist. Another example might include somebody that knows that they will be in trouble with their partner if they get home drunk so simply doesn’t go home.
Any scenario in which the person involved refuses to look at the truth of the situation could be described as them engaging in the ostrich effect. There are countless different scenarios in which we can see this play out in our everyday lives. Someone who is overweight, for example, might refuse to get on the scales. However, just because we won’t admit that something is true doesn’t mean that it’s false.
How It Relates To Gambling
In the world of gambling we can see the ostrich effect at play time and again. Perhaps a bettor knows that they can get better odds if they were to go with a different bookmaker than the one that they usually use. However, they don’t want to have to engage with the process of signing up to a new account, so they simply place the bet with the usual bookmaker taking lower odds as a result.
In this instance, a bettor has willingly ignored valuable information simply to make their lives easier. Another example might involve someone at the roulette wheel in a casino. They pay no attention to how many chips they’ve got, betting with impunity. Rather than look to see how much money they are winning or losing, they bury their head in the sand and bet until the money runs out.
When it comes to sports betting, we can see the ostrich effect at play when people refuse to acknowledge the stats and information that is readily available before placing their bets. Instead, the punter only looks to see if there is any information or any statistics that backup the bet that they were already going to make. Once again, we see people Bury their heads in the sand rather than acknowledge a simple truth.
How To Avoid The Ostrich Effect
There are countless biases in play every time we do anything. We can’t avoid them in their entirety, so the best thing to do is to figure out how to mitigate them. In the case of the ostrich effect, it’s important to constantly question ourselves and ensure that we aren’t guilty of ignoring information simply because we don’t like it. We have to try to assess all information as neutrally as possible when we are looking to place bets.
It is not uncommon, for example, for sports fans to bet against the team in the hope that it will lead to a positive result for the team that they support. The problem is, this often involves ignoring the fact that the team they are betting against is the superior one. In many cases, people who placed these types of consolation that don’t care that they’re going to lose money as long as it helps the team.
Obviously this is the sort of thing we need to avoid as much as possible. It’s no use ignoring clear facts in the hope that something we know is unlikely to happen will be avoided. As a bettor, one of the key things that you need to do is look at all information available to you dispassionately. Where possible we need to take everything into account and not just the information that supports our theory.