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Behavioural Finance - The impact of Relative Framing

Author: Adam Sideserf
10 December, 2015

For example, if a bottle of mayonnaise is described as being 80% fat free then we may be more inclined to choose it than if it was labelled as containing 20% fat, even though the two descriptions are equivalent.

The Framing effect

The trouble is that framing impacts our understanding in ways that we are not always aware of.

For instance, if a problem is presented in two very different, but equivalent ways, individuals will often end up making inconsistent decisions.

Let’s take a look at a classic experiment on framing carried out by Amos Tversky and Daniel Kahneman.

In this experiment, 600 people were deemed to be affected by a hypothetical deadly disease and participants were asked to choose between two alternative solutions in order to deal with the outbreak:

  • If option A is chosen then 200 people will be saved
  • If option B is chosen then there is a one in three chance of saving all 600 people and a two in three chance that no-one will be saved

72% of the respondents chose option A

The same scenario was the repeated with a second group of participants but with slightly different wording:

  • If option C is chosen then 400 people will die
  • If option D is chosen then there is a one in three chance that no-one will die and a two in three chance that all 600 people will die

78% of the respondents chose option D (even though this is equivalent to option B)

In fact, the two problems are effectively identical. The only difference between them is how the outcomes are presented, or framed. In the first set, the outcomes are given a positive frame by emphasising the amount of lives saved, whereas the second set is presented in a much more negative way by concentrating on the number of lives lost.

This experiment clearly illustrates the effect that framing can have on an individual and their decision making.

Emphasis framing

As well as being susceptible to the influence of framing when it comes to equivalent information, we can also be led astray, to some extent, by the influence of what is called emphasis framing.

Emphasis framing involves focussing on particular subsets of information, in a way that does not completely reflect reality or present a balanced picture of a particular issue or situation.

This effect is often used by politicians to frame an issue in a way that emphasises certain facts or figures in order to promote their own political leanings whilst overlooking other information that might be just as relevant.

Framing and your finances

Whereas the framing of certain issues in everyday life might lead to possible misunderstandings, when it comes to financial decision making, it can potentially lead to unsound investment choices being made.

Many of us are extremely sensitive to the way in which investments are framed. Simple word changes can have a dramatic effect on how particular investments are perceived by individuals and whether they are chosen or not.

It is vital, therefore, that investors ensure that they get a fully balanced sense of all the investment options that are available to them and are not, inadvertently, influenced by information and statistics framed in such a way that distorts the real dynamics or the risks involved in a particular investment scenario.