Tag Archives: Framing Effect

Framing Effect – how options are presented


Framing Effect – how options are presented
Framing effect is an example of cognitive bias, in which people react differently to a particular choice depending on whether it is presented as a loss or as a gain. People tend to avoid risk when a positive frame is presented but seek risks when a negative frame is presented.  Gain and loss are defined in the scenario as descriptions of outcomes (e.g. lives lost or saved, disease patients treated and not treated, lives saved and lost during accidents, etc.).
http://en.wikipedia.org/wiki/Framing_effect_%28psychology%29

This is basically how you put the options or ask questions to a person or a group of people. You can derive the expected answer by framing the options or questions in such a way that most of them will choose the option or answer that you expect them to choose.

A research shows that a car accident video was shown to two sets of people. The first set was asked to guess the speed of the cars before they went into ‘contact’. The other group was asked to guess the speed of the cars before ‘collision’. Because of the words chosen, the second group guessed the speed of the cars to be a lot more than the speed mentioned by the first group. Also, when asked whether they noticed the smashed glass in the accident scene, the second group told that they found smashed glasses in the scene. But, there were no shattered glasses in the scene at all.

Framing Effect examples
1. Which one is heavier – a pound of sand or a pound of cotton buds? – Surprisingly, few times I have personally seen people instantly say ‘a pound of sand’. Try this out with your friends.
2. Which pack of chips is good for health? – 80% lean or 20% fat? – Looks like most people chose 80% lean, though both packs have same amount of fat.
3. We have watched in movies that in a courtroom scene, procedures do not allow lawyers to “lead” a witness when asking questions, in order to prevent the witness to fall prey to the framing effect.
4. Using the term ‘global warming’ causes a higher impact than the term ‘climate change’
5. Several instances of mis-selling of financial products like insurance policies, Ulips, teaser loans, 0% interest on retail products purchase loans etc.,

Overcoming Framing Effect
1. Properly analyse and calculate all the possibilities before making a decision
2. Like Charlie Munger referred, ‘Invert’, ‘Always Invert’ – Ask questions from all dimensions and even stand on the other side of the table and look at the options
3. If anything is too good to be true, take the cautions side and delay the decision
4. Learn probability and calculate the % of success and failure, before betting anything big.

My experience with Framing Effect
My early day insurance policies were Money Back or Endowment policies. My insurance agent explained all the types of policies his company had on offer, and clearly insisted on me buying these types of policies because I will get ‘the premium + bonus’ back after certain number of years. He also highlighted that I ‘will not get any money from the company’ if I choose the term plans. Neither he explained, nor did I analyse all the aspects of all types of policies.

Net net, he framed the options in such a way that
– option 1 = pay premium, and get it back with bonus at the end of policy term
– option 2 = pay lower premium, and lose all of it at the end of policy term
So, now you know which option I had chosen. 🙂

Of course, after I started learning personal finance and investing, the first few things I did was to surrender all the above types of policies, and chose only one term plan.

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Filed under Behavioural Finance