Framing: A Comprehensive Explanation
Definition:
Framing is the way information is presented to individuals, which significantly affects their
decisions and judgments. Even when the content of the information remains the same, the way it
is "framed" (phrased or structured) can alter the perception of the information and,
3
consequently, the choices made.
Framing plays a central role in behavioral finance because it shows how psychological biases
can lead individuals away from purely rational decision-making.
2
The Psychology Behind Framing
. Cognitive Bias:
Humans are influenced by cognitive biases, meaning they interpret information based on
their experiences, emotions, and perspectives rather than analyzing it objectively.
1
. System 1 Thinking:
Framing often triggers fast, automatic, and emotional reactions (System 1 thinking, as
described by Daniel Kahneman in Thinking, Fast and Slow). This contrasts with slower,
more rational (System 2) thinking.
. Loss Aversion:
Framing is closely linked to loss aversion, where people fear losses more than they value
equivalent gains. For example, people may reject a gamble offering a 50% chance to win
3
$100 and a 50% chance to lose $100, even though the potential outcomes are balanced.
Types of Framing in Behavioral Finance
2
. Positive vs. Negative Framing:
○ Positive framing presents outcomes in a favorable light, emphasizing potential
benefits.
1
○ Negative framing highlights risks or drawbacks, focusing on what could go wrong.
. Example:
○ Positive Frame: "This investment has a 90% chance of success."
○ Negative Frame: "This investment has a 10% chance of failure."
Even though the probability is the same, people are more likely to choose the option
framed positively.
. Gain vs. Loss Framing:
○ Decisions framed as gains lead to risk-averse behavior.
○ Decisions framed as losses lead to risk-seeking behavior.
. Example:
○ Gain Frame: "If you invest $10,000 in this bond, you will safely earn $500 in interest
4
annually."
○ Loss Frame: "If you invest $10,000 in this bond, you risk losing out on the higher
returns you could earn in the stock market."
. Attribute Framing:
○ Focuses on specific features of an option rather than overall outcomes.
Example: Meat advertised as "80% lean" appears healthier than the same meat
described as "20% fat."
. Goal Framing:
○ Emphasizes the outcomes of an action or inaction.
Example: A bank may promote savings accounts by saying, "Save now and secure
your future" (goal-focused) rather than "Don't save and face financial insecurity"
(fear-based).
How Framing Influences Financial Decisions
. Investment Choices:
○ Investors are more likely to buy a fund described as having "a 90% chance of
positive returns" than one described asg "a 10% chance of loss."
. Insurance Decisions:
○ People are more inclined to buy insurance framed as "protection against losing your
home" compared to "a small fee for uncertain events."
. Consumer Behavior:
○ Discounts are more attractive when framed as "Save $10" rather than "Spend $90."
. Retirement Savings:
○ Framing retirement savings as "secure income in old age" is more effective than
"delayed consumption."
Real-Life Examples of Framing
. Healthcare Decision-Making:
○ A study asked participants to choose between two treatments:
◆ Treatment A: "90% of patients survive."
◆ Treatment B: "10% of patients die."
○ Most people chose Treatment A, even though both options are identical.
. Credit Card Marketing:
○ Companies frame credit card fees as "rewards points loss" if you use cash instead
○
of emphasizing the added cost of using a credit card.
. Stock Market Headlines:
○ "The market is up 15% this year" (positive frame) makes people optimistic, while
"The market is down 5% this quarter" (negative frame) triggers concern, even if
both frames are part of the same market cycle.
Why Framing Matters in Behavioral Finance
. Emotional Reactions:
Framing often evokes emotional responses. Positive framing generates feelings of
optimism, while negative framing induces fear or caution.
. Overcoming Rationality:
Even financially literate individuals are not immune to the effects of framing, as it often
bypasses logic and taps into subconscious biases.
. Behavioral Patterns:
Understanding framing helps explain why investors avoid selling losing stocks (fear of
loss) or jump into markets during bubbles (optimistic framing of gains).
Limitations and Risks of Framing
. Manipulation:
○ Framing can be used to manipulate people into making decisions that may not align
with their best interests.
. Inconsistent Decisions:
○ People exposed to multiple frames for the same decision might make inconsistent
choices, reducing financial stability.
. Bias Amplification:
○ Framing often amplifies existing biases, such as anchoring or loss aversion.
Visualizing Framing
Below is a conceptual diagram that illustrates how framing influences decisions:
Scenario Positive Frame Negative Frame
Investment "Earn 90% positive "10% chance of losing
returns" money"
Insurance "Protect your family" "Avoid leaving your
family vulnerable"
Medical Treatment "90% survival rate" "10% chance of death"
How to Overcome Framing Bias
. Ask for Multiple Perspectives:
Evaluate decisions from different angles to reduce reliance on any single frame.
. Quantify the Facts:
Focus on the numbers and data behind the frame, not just the wording.
. Use Rational Thinking:
Engage in System 2 thinking by slowing down and logically analyzing all available options.
