I am not sure whether the saying “to bury one’s head in the sand” is known worldwide. In Germany it is associated with ostriches, allegedly burying their head to avoid danger. Of course, this is a mere fairy tale. But from the image in our mind, we can draw interesting conclusions – for our personal and our professional life. This phenomenon was named the Ostrich Effect – and it threatens the performance of investment bankers and legal professionals alike.
“Facts do not cease to exist because they are ignored.”
— Aldous Huxley
The Ostrich Effect leads us to “[avoid] apparently risky financial situations by pretending they do not exist” – in other words: to look away from unpleasant news. (Galai, D.; Sade, O. (2006) “The Ostrich Effect and the relationship between the liquidity and the yields of financial assets”, SSRN working paper) This effect caused Scandinavians in representative research to check the value of their investments 50-80% less often when the markets were performing badly. (Karlsson, N.; Loewenstein, G.; Seppi, D. (2009). “The ostrich effect: Selective attention to information”. Journal of Risk and Uncertainty. 38 (2): 95–115.) Further, Galai and Sade found, that individuals prefer an investment with unreported risk over an investment with reported risk. They concluded “that as uncertainty increases, so does the premium investors are willing to pay for the “bliss of ignorance””.
Even though there is critical research on the ostrich effect (Gherzi et al. (2014). “The meerkat effect: Personality and market returns affect investors’ portfolio monitoring behaviour”. Journal of Economic Behavior & Organization. 107: 512–526.), the organizational psychologist Bill Kahn sees the Ostrich Effect as a main reason for problems at work. He states that people fasten upon compelling distractions to express their emotions – creating an unsolvable conflict.
Confirmation Bias and “story-telling” increase the effect. Often, people tend to tell themselves stories to avoid looking at unpleasant news. Psychology Today calls such stories a framing device. They help us to focus on a possible explanation instead of thinking about the true reasons for someone’s behavior or a development in our environment. Confirmation Bias is then supporting the new world view to fit with our beliefs, creating an even more radical and more hardened misconception of the world.
The Legal Profession has various possible vulnerabilities. Your client might not be able to give you the full facts or a reliable risk assessment due to his closing his eyes to substantial facts. This might for example turn out harmful in bankruptcy cases. We can expect the effect to be stronger in family business bankruptcy cases, since there is much more emotional value at stake. Moreover, the combination of the Ostrich Effect with hubris will combine to a lethal cocktail in bankruptcy recognition.
Further effects can be expected in criminal law. Prosecutors and the police might falsely evaluate a situation and then investigate the wrong direction strengthened by their Confirmation Bias. “The Ostrich Effect is where the team ignores information they don’t want to hear. This can have minimal impact on the case, but a possible impact of the ostrich effect is a Brady violation (recall that in U.S. v. Brady, the Supreme Court of the United States ruled that all information, whether it incriminates or exonerates the suspect, must be provided).” (Hayden, Donald A. “Child Abuse Investigation: From Dispatch to Disposition”, 290)
Last but not least, the Ostrich Effect can hurt your own legal consulting services by not letting you admit your very own mistakes to yourself and your supervisors. Even though your cognitive self might know that a mistake is only increasingly damaging if it is not identified and properly handled, your biased self might tend to deny the mistake.
To avoid the Ostrich Effect one can focus on events bearing the risk of creating enough pressure to make our brains change into ostrich mode. As always: Knowledge is the very first step to create an awareness for these situations. The outside-view can be of enormous help when it comes to deciding whether a situation bears an inherent risk. Ask yourself how you would react if you were a neutral bystander. The good news is: An awareness of risk-bearing situations is easy to be learned once you understand the pattern. Know it, study it, fight it!
PHILIP HATTEMER
