What is The Framing Effect?

Updated: May 2, 2024

Listen to this episode:

What is the framing effect?

The framing effect is a cognitive bias that occurs when our decisions are influenced by how information is presented or framed.

Essentially, the same information can be presented in different ways, leading to different outcomes based on how it is stated.

This bias highlights the fact that our decision-making is based on more than just the content of the information but also on how it is conveyed.

Examples of the framing effect:

Let’s dive into a few simple examples to illustrate how the framing effect works.

Example 1: Medical treatment options

Imagine you’re given two options for a medical treatment.

Option A has a 90% success rate, while Option B has a 10% failure rate.

Which option would you choose? (pause)

Although both descriptions convey the same information, people tend to prefer Option A because it’s framed positively with a focus on success.

This demonstrates how the framing effect can influence our decision-making, even when the underlying information remains unchanged.

Example 2: Insurance and investment

Two financial products are being offered to you.

Product A is a life insurance policy with an investment component, while Product B is an investment with life insurance benefits.

Which one would you get?

Despite being the same, most people will be more inclined to get Product B because putting money into an investment product is more enticing than buying a life insurance policy.

And this is why some insurance agents market VUL policies as an investment instead of a life insurance product.

Example 3: Investment decisions

In a study by Brigitte Madrian and Dennis Shea, new company hires were asked, “Do you want to participate in a retirement plan?”

37% said yes.

Then they changed the question. They instead told them, “You will participate in a retirement plan unless you choose not to.”

This time, 86% agreed to participate.

Apparently, it’s easier for people to say “No” if you offer them something than to ask them to give back something that was automatically given to them.

In a way, loss aversion bias is also at play here.

But the point is, nobody was being forced to participate in the retirement plan, but the difference in how the offer was framed resulted in a huge difference in participation.

Dealing with the framing effect:

Now that we understand how framing can shape our decisions let’s discuss some strategies to mitigate its influence and make more informed choices.

1. Recognize the framing bias.

Awareness is the first step in combating the framing effect.

By understanding that our decisions can be swayed by how information is presented, we can be more mindful of our own biases and critically analyze the framing of information before making decisions.

2. Seek alternative perspectives.

When faced with a decision, actively seek out different perspectives or alternative framings of the information.

By considering multiple viewpoints, you can broaden your understanding and make more balanced decisions.

3. Focus on the underlying facts.

Strip away the framing and try to focus on the objective facts and data behind a decision.

By analyzing the raw information rather than being influenced by its presentation, you can better understand the situation and make more rational choices.

4. Consult trusted advisors.

In complex financial matters, seeking advice from trusted professionals can help counteract the framing effect.

A knowledgeable financial advisor can provide unbiased guidance, helping you make decisions based on sound financial principles rather than being swayed by framing biases.

Conclusion:

The framing effect is a powerful cognitive bias that can significantly impact our financial decision-making.

By recognizing its influence, seeking alternative perspectives, focusing on underlying facts, and consulting trusted advisors, we can mitigate the impact of the framing effect and make more informed choices.

The 80 Percent Express are special short episodes where I share a financial concept or answer a question sent by a listener.

Ask me a question for the podcast: Send a voice message here.

Follow The 80 Percent Podcast:

Leave a Reply

Your email address will not be published. Required fields are marked *