Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Investors behave like ostriches in choosing bank deposits over t-bills

07.09.2005


Do investors act like ostriches?


Why do people prefer to put their money into closed, interest-bearing bank deposits, when they could invest it in liquid, higher-yielding government treasury bills (T-bills) at no greater risk?

It’s all because of what Hebrew University of Jerusalem researchers Prof. Dan Galai and Dr. Orly Sade call the “ostrich effect” – that is, investors “burying their heads in the sand” like ostriches so as to ignore what they perceive as a risky situation.

Galai, the Abe Gray Professor of Business Administration, and Sade, both of the Hebrew University’s Jerusalem School of Business Administration, examined the savings habits of Israelis as well as Americans in this regard. Their findings will be published in a forthcoming issue of the Journal of Business, one of the world’s leading finance journals.



Galai and Sade found that during 1999 to 2002, government treasury bills in Israel provided a higher yield to maturity than interest-bearing, non-liquid, one-year bank deposits (after taking into account relevant transaction costs). Both types of investment offer the same level of low risk. They also found a similar type of return gap in the U.S. during February 2005.

Since the authors provide field data indicating that investors prefer to hold non-liquid assets and are willing to pay a premium for them, their findings are challenging the premise that one would generally expect to find: that people would normally accept a lower return in return for the benefit of liquidity.

The “return gap” documented in Israel cannot be attributed to taxes, risk or transaction costs. As a result the natural question to ask is why investors invest in one-year bank deposits if they can earn higher returns by investing in T-bills?

The authors explain the findings by using a psychological explanation -- what they call the “ostrich effect” -- attributing this seemingly anomalous behavior to an aversion to receiving information on potential interim losses. In this case the reference is to daily fluctuations in the value of T-bills, which are publicly traded and regularly reported upon in the media and in investors’ individual financial statements.

On the other hand, changes in bank savings interest are not generally publicly reported. Since these bank deposits are not marketed, loss-averse investors are able to ignore market information. Like ostriches, the investors don’t want to “see” what looks to them as a risky (T-bill) investment, even though the risk is minimal (treasury bills will always pay their stated return if held to maturity, regardless of price fluctuations) and is not greater than the risk involved in fluctuating interest rates for bank deposits.

The authors conclude that by and large, when faced with uncertain investments, many individuals prefer investments where the risk is unreported over similar investments (from the standpoint of risk-return) where the risks are frequently reported. This behavior ignores the fact that should the investor in the bank deposit require his money before the designated maturation date, he will suffer loss of interest and penalties for early withdrawal – which is not the case with selling the liquid T-bills.

As predicted by the ostrich effect, the authors find that the difference between the return on the liquid asset relative to the non-liquid asset is higher in periods of greater uncertainty in the financial markets.

Jerry Barach | alfa
Further information:
http://www.huji.ac.il

More articles from Business and Finance:

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

nachricht Preferential trade agreements enhance global trade at the expense of its resilience
17.02.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

Im Focus: Researchers Imitate Molecular Crowding in Cells

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to simulate these confined natural conditions in artificial vesicles for the first time. As reported in the academic journal Small, the results are offering better insight into the development of nanoreactors and artificial organelles.

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

Northern oceans pumped CO2 into the atmosphere

27.03.2017 | Earth Sciences

Fingerprint' technique spots frog populations at risk from pollution

27.03.2017 | Life Sciences

Big data approach to predict protein structure

27.03.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>