What Is Framing Effect And How To Avoid It
Decision making, especially financial decision making, requires a lot of mental energy to be effective. Which is why the brain often relies on heuristics to lighten the load. The catch is that this can, and often does, lead to biased behaviour. Framing effect is an example of a heuristic that can lead to biased decision making.
What is framing effect
Framing effect is a phenomenon where the way information is presented to us can alter our decision.
We as people tend to want to avoid loss, so when information is presented in a way that emphasises what we can gain or what we can avoid losing, it has the power to sway our decision making.
Especially when it comes to similar products, the way they are advertised can have a huge impact, even if one product isn’t superior to the other.
Consider products saying:
“80% fat free”
vs.
“20% fat”
The amount of fat is the same but if you wanted to avoid fat you would most likely be more drawn to the 80% fat free one. The opposite would be true if you were looking for higher fat content in your food.
Prospect theory, by Daniel Kahneman and Amos Tversky, says that losing something hits us harder than getting something, so we avoid losing as much as possible. This is why framing effect usually happens.
The way something is said makes us think that we aren’t losing.
Framing effect is everywhere, marketing, news, politics and so on. The WAY something is said can sometimes overpower WHAT is said, even though the what is more important.
On a personal level this can lead to not ideal decision making, and on society’s level it can lead it to positive or negative public opinion depending on how matters are discussed, what sides are emphasised and what simply isn’t spoken about.
How to avoid it
The framing effect affects you less the more involved you are with the matter. This means that you are more invested and interested in the subject so are more likely to look for additional information rather than make quick decisions based on how something has been framed.
So it’s good to know that this effect doesn’t really make a huge difference when you make decisions around things that you are interested in and care a lot about.
But what about those things that you don’t really care about?
Well, making sure that you do your research before making decisions based on what a specific source says can eliminate framing effect. This mean looking for information from different perspectives and sources can give you a well rounded understanding.
A study suggests that listing reasons for making a specific decision is a great way to avoid framing effect as well.
Framing effect in personal finance
This effect is quite important to keep in mind when making personal finance decisions.
For example when it comes to investment and insurance decisions, providers or their endorses (like influencers these days!) may emphasise the good side of the decision like the gains you might be able to make or how the cost is cheap of what not.
But then they fail to mention about the possible risks when it comes to investments or maybe the possible exclusion policies when it comes to insurances. Or if they are mentioned they might be somewhere at the end with a fine print.
You might no even read it, or if you do, you won’t give that information the same value after they have been hyping up the good side of things.
For this reason it is so extremely important (and I really can’t stress this enough!) to make sure you get well rounded information that talks about the up side but also the possible down side of things in an appropriate way so you can make a well informed decision.
And always, always do your research, don’t take things on the face value and talk to others about “investment opportunities”. They might see red flags even if you haven’t noticed them.
You can read more about the framing effect here.
Has framing effect ever affected you?
