This blog post series has already come a long way in describing our heuristics and cognitive biases, and how they affect our decision making. In this post, we’re going to look at some framing effect examples. We’ll explain how framing bias can influence the way we perceive a situation or decision. And we’ll present different positive and negative framing examples to help illustrate this.

1. The framing effect
2. Framing effect examples
3. The compromise effect
4. Narrow frames
5. Glossing
6. How to guard against the framing effect

The framing effect definition refers to a situation whereby we fail to see through the way in which information is provided to us. If you know the phrase: “it’s not what you say, but how you say it” you’re familiar with framing. You’ll likely get a different response if you say “Hey, the kitchen is dirty!” rather than, “It would be great if you could help me clean the kitchen, love.”

Let’s look at a framing bias example (adapted from Amos Tversky and Daniel Kahneman’s examples of framing in everyday life). Imagine that your country is preparing for the outbreak of an unusual disease (sound familiar?), which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume the exact scientific estimates of the consequences of the programs are as follows:

If program A is adopted 200 people will be saved.

If program B is adopted there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no one will be saved.

Which program do you support (write it down, A or B)?

Now, the same disease from the earlier question is back. Only this time the two programs now have the following payoffs:

If program A is adopted 400 people will die.

If program B is adopted there is a 1/3 probability that nobody will die, and a 2/3 probability that 600 people will die.

Which program do you choose (write it down again, A or B)?

Now compare your two answers. There is no attempt at trickery with the two questions. If we were perfectly rational, then there should be no difference in our answers, or the degree to which we were certain of our choice, because the estimated payoffs between the two programs in each example were identical. The only difference was the way in which the information was framed, whether in terms of saving 200 people (a positive frame) or 400 people dying (a negative frame).

When framed in terms of saving lives (the 1st question), most people choose program A (the certain option). And when framed in terms of people dying (the 2nd question), people either select program B (the gamble) or there is indifference between the two programs ( Prospect theory – read more about it here). This is a major problem for economics which claims that people’s preferences should be stable. These questions show that there is preference reversal: that different frames and presenting information in different ways results in different choices being made.

We make decisions that are influenced by the manner in which information about something is presented. Imagine you are in the shop and you want to purchase healthy yoghurt (and let’s pretend that your definition of healthy is the elimination of fat). You see two tubs of yoghurt. One says it’s ‘99% fat free’, the other says it’s ‘1% fat’. If you think about it, both yoghurts make the same claim about their fat content. However, people are more likely to choose the ‘99% fat free’ yoghurt. The only difference being that the fat content was framed differently.

It can be argued that framing isn’t really a psychological bias – it’s simply how me make sense of life. But with that argument, we can probably explain away most biases. We can agree that without framing we don’t have any context to a situation or decision. But the problem is that it influences our perceptions of things.

If you’re a capitalist, then a reasonable argument for the socialisation of health care won’t interest you either. Are you starting to see the problem?

Related to framing is The Compromise Effect. This is where we have the tendency to select a compromised choice when it is framed by two extremes (a clever sales trick).

Consider a restaurant wine list. Typically, most wine lists have a few expensive options, a few cheap options and then some mid-range options. The reality is that the mid-range options are often surprisingly expensive, but when viewed as the reasonable compromise between the comparatively expensive and cheap options, the price of the mid-range wine appears reasonable. Consider the following wine list:

The $60 bottle of wine seems expensive, it’s three times more expensive than the other two bottles. This is clearly an expensive wine reserved for special occasions and your impulse will be to go for one of the $20 bottles of wine.

Now consider this wine list:

Again, there is an expensive $200 bottle of wine on the list. But now, the $20 bottle of wine is worryingly cheap and obviously not good. Thus, you’ll compromise for the $60 bottle which seems like the more compelling and reasonable choice.

What you can learn from these framing effect examples is that you’re strangely willing to spend more on mid-range options when they are framed by cheap and expensive options (the use of reference points). If the $200 bottle of wine were to be removed from the 2nd menu, suddenly the $60 bottle would appear too expensive.

To add another dimension – the size of the frame is also important (sometimes size does matter). ‘Narrow framing’ is a term used to describe someone who views each individual share or investment in isolation. The frame of reference is simply the individual company or investment. In this same context, a wider frame would refer to someone rather viewing their entire share portfolio or overall wealth. It might not sound like there is too much of a difference between these two approaches, but there is. The trouble with framing is that while it doesn’t look like it will make a difference, it really does.

Investors who make decisions based on a narrow frame of reference have poorly diversified portfolios when compared to those with wider frames. Consider the financial impact of this on a business. This doesn’t always equate to lower returns, but it indeed equates to greater volatility and higher risk. 

Narrow framing is linked to the disposition effect. But in short it refers to our tendency to sell shares that have increased in price ( gain domain) and hold onto shares that have decreased in price ( loss domain).

From a quantitative perspective, perhaps the best advice is to remember that ‘price does not necessarily indicate value’. Framing is not always intentional and thus it’s important to consider the effect it might have on any decisions.

When trying to evaluate or study things critically, consider what frame you’re looking through. Re-word the argument, particularly the argument of those who are trying to persuade you to choose something. As we can see in the framing effect examples given – if you change the frame – you make a different decision.

Have the awareness that everything that is communicated to you contains an element of framing. Every fact, even if you heard it from a reliable source, is subject to this bias. Even this blog post.

• Heuristics and biases in decision making – This was the first post in the series which shares some behavioural economics research. Specifically, the heuristics and biases that influence our relationship with money. It uses System 1 and System 2 thinking examples from Daniel Kahneman’s New York Times best selling book, Thinking Fast and Slow, to help us be more conscious of the workings of our brain. 

• Mirror, mirror, on the wall, stop telling me I’m wonderful – This post focuses on the impact of overconfidence bias in decision making. It introduces the illusion of knowledge bias and the illusion of control bias to illustrate the difference between confidence and carelessness. It also discusses the better than average effect, the self-serving bias and fundamental attribution error. You’ll learn how to confront some unpalatable truths and get out of any false sense of comfort (if you’re up for the challenge?).

• Why you can’t argue with a vegan – Ballsy title, we know. But if you read the post you’ll (hopefully) understand why. We’ll be discussing confirmation bias. It’s one of those psychological biases that you can see everywhere. We’ll also touch on cognitive dissonance theory. We all struggle with these biases. They’re both humorous and serious. But because of that, it’s useful to know how to avoid confirmation bias when you need to.

• Loss aversion vs risk aversion – Once you understand framing, you’re ready for this post. It introduces an incredibly powerful bias known as loss aversion. It also touches on prospect theory, the disposition effect and impression management.

• Anchors pulling you down? – Anchoring bias is a straightforward behavioural bias that causes us to focus on a certain initial value and then make decisions with reference to it. This post looks at some examples of this anchoring effect.

• The danger of the default – Default options nudge us to make better decisions. The option of opting out also respects freedom of choice. This post unpacks this notion of libertarian paternalism and the perils of status quo bias.

• Regret, it’s not a nice feeling – Regret influences the decisions we make and pushes us to conform to social norms. Examples of regret avoidance show us how this makes complete sense yet no sense at all.

• When the past influences the future – The Concorde effect is a famous example of sunk cost investment. Too often we invest time, money and energy into something we should’ve just abandoned. This post looks at some examples of how sunk cost fallacy affects our human decision processes.

• What’s mine is more valuable – In this post, you’ll learn why you place extra value on things you own. The endowment effect has implications for our investment portfolio, bonuses and consumer behaviour.

• How to improve self-control – Self-control is an essential life skill. It’s what separates humans from the rest of the animal kingdom. Learn how to improve self-control to achieve your long-term goals.

• Procrastination is the enemy of success – We know procrastination is the enemy of success. But while it looks like laziness, it’s often just mental exhaustion at play. Learn how to overcome procrastination.

• The problem with wanting it now – When you delay instant gratification, you will experience long-term satisfaction. It’s the hyperbolic vs exponential discounting debate. Don’t let present bias win!

• The power of first impressions – The order of information influences your decisions. First impressions matter! It’s all got to do with primacy and recency effects.

• We prefer wrong information to no information – Availability bias and survivorship bias influence our decision-making. We make decisions based on the information available to us.

• Learn to deal with uncertainty – Risk and uncertainty will always surround us. Gambler’s Fallacy, the hot-hand effect, the law of small numbers & ambiguity aversion are just some of the biases that arise because of it.

• Stop stereotyping – Representativeness heuristic refers to the fact that we stereotype. It’s a mental shortcut. But beware of making unfounded comparisons.

• Mental Accounting – Money is money! Or is it? Mental accounting says we place different values on different money which leads to irrational decision making.

• Money Illusion– Money illusion is a sneaky bias. It causes us to focus on the amount of money in our hands, rather than it’s purchasing power.

• Home bias – We invest close to home and in what we know. But this lack of diversification results in missed opportunities. Say hello to ‘home bias’.