Latticework of Mental Models: Framing Effect

“Is it okay to smoke a cigarette while praying to God?” a young man asked his father, a religious man.

“Of course it’s bad. It’s a great sin and very disrespectful act,” the father replied. He was disturbed with his son’s atrocious question.

“But last time you told me that to get rid of my addiction I should start praying while smoking. Didn’t you say that?” It seemed to him that his father was contradicting himself.

“No my son! Don’t confuse smoking-while-praying with praying-while-smoking,” the father explained.

“But what’s the difference?” the son was perplexed.

“There is a difference. A huge difference. I don’t know what but my brain tells me that there is.”

Now before we get started on a debate about the validity of father’s argument, let me clarify that the reason I brought up this anecdote was to highlight an important mental bias which plays out in our affairs very subtly.

In fact somebody made a TV commercial [1] on the same line of thought and I found it very amusing.

Even school kids are learning this trick to manipulate their unsuspecting elders.

The kid knows – “It’s not what you say, it’s how you say it.” That, in short, is Framing.

The way you frame the options is very important. How a message is communicated affects the way it is received. Framing has strong implications on our behaviour. Even small and seemingly inconsequential changes in the wordings of a problem can result in large changes of preferences.

In his book, The Art of Thinking Clearly [2], Rolf Dobelli writes –

Glossing is a popular type of framing. Under its rules, a tumbling share price becomes ‘correction’. An overpaid acquisition price is branded ‘goodwill’. In every management course, a problem magically transforms into an ‘opportunity’ or a ‘challenge’. A person who is fired is ‘reassessing his career’. A fallen soldier – regardless of how much bad luck or stupidity led to his death – turns into a ‘war hero’. Genocide translates to ‘ethnic cleansing’.

Now, it may just seem an intelligent play of words. And one might be tempted to explain this human behaviour by a simple logic – different words arouse different level of emotional response. But if you stop there, you’re going to miss a very critical idea here. There is more juice than meets the eye.

It turns out that Framing is a cognitive bias and hence a very important mental model from psychology. It says people react differently to a particular choice depending on whether, and especially when, it is presented as a loss or as a gain.

We find “99% fat free” food products enticing but if the same message says “contains 1% fat”, it would trigger a different response from us. Just by rearranging the available set of options, people can be nudged to opt for a specific choice.

It’s not only a clever marketing trick to sell products but it can effectively be used by policy makers to increase compliance and even for improving our relationships. In case you want to dig deeper on this, Richard Thaler has written a book called Nudge [3], which primarily deals with the idea of designing choice architectures.

What scientists and psychologists have found is that 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.).

Framing and Loss Aversion

Framing is an outcome of our aversion to losses. Evolution has programmed our brain to seek loss minimization instead of gain maximizing. As a result our brains, subconsciously, are always choosing the path of least pain.

Let’s assume that there is a way to quantify or measure the human emotions of pain or pleasure and let’s say the units for that measure is ‘aha’. So, ideally, loss of say Rs 100 should give you a pain of 10 ahas and gain of Rs 100 will fetch you a pleasure of 10 ahas. Right?

Not really! The fact of the matter is that the pain of losing Rs 100 is little more, something like 15 ahas.

Nobel Prize winning psychologist Daniel Kahneman, who is considered the father of behavioural economics, describes an experiment in his book Thinking, Fast and Slow [4] –

We introduced our discussion of framing by an example that has become known as the “Asian disease problem”:

Imagine that the United States is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that 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 one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved.

A substantial majority of respondents choose program A: they prefer the certain option over the gamble.

The outcomes of the programs are framed differently in a second version:

If program X is adopted, 400 people will die.
If program Y is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die

Look closely and compare the two versions: the consequences of programs A and X are identical; so are the consequences of programs B and Y. In the second frame, however, a large majority of people choose the gamble.

So we see that the way in which an uncertain possibility is presented may have a substantial effect on how people respond to it. And many a times this has serious implications.

For example, when asked whether they would choose surgery in a hypothetical medical emergency, many more people said that they would when the chance of survival was given as 80 percent than when the chance of death was given as 20 percent.

As you can see, it’s not the trivial matter about to-eat-or-not-to-eat that 99% fat free ice cream. It’s the matter of life and death and still people, under the spell of Framing, falter in thinking rationally.

Framing in Investing

The problem of Framing surfaces in investor behaviour in numerous ways. Let’s look at some of them.

One of the common mistakes made by early investors in stock market is to sell their winning stocks and hold on to their losers. It’s called Disposition Effect which is an instance of narrow framing. Here’s an excerpt from Jana’s blog [5] –

…One of the main reason for this is we like winning more than losing. Also we have a mental account for each stock that is in our portfolio and we want to close every account with a gain. We keep an internal score for each stock. Instead of looking at the overall portfolio performance we look to gain from every stock. This narrow framing is called as disposition effect and it leads to selling winners and holding losers.

So narrow framing, a flavour of framing effect, is our inability to zoom out on the situation. This creates a faulty perspective. To explain this with the help of an example. Let’s say we toss a coin and offer you the following bet –

On heads, you win Rs 60.
On tails, you lose Rs 40.

Should you accept or reject the bet? Most people would reject it.

What if you had an option to accept a series of such bets, say 100 coins tosses each with the same offer? Now it becomes an attractive proposal, because over a series of multiples tosses, the probability of head and tail is 50-50. So even if you lose money on some of the bets, your net gains are going to be much closer to the expected value of this bet i.e., Rs 10 per bet. That’s roughly the idea behind broad framing.

Kahneman writes –

The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and many be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes.

So now you have another reason to get rid of your portfolio tracker. 🙂

Breaking the Frame

So how do you overcome Framing? Peter Bevelin, author of the must read book, Seeking Wisdom [6], suggests –

The answers we get depend on the questions we ask. The British philosopher Herbert Spencer said: “How often misused words generate misleading thoughts.” Consider how a statement, problem, consequence, or question is presented. How is it worded? What is its context? Are we considering certain features and ignoring others? Emotional, selective and appealing frames influence us.

The second strategy is to invert the problem statement. That’s called principle of inversion [7]. By doing so, some of the things which usually remain hidden from your view, because of your intuitive brain, resurface and you get a fresh view.

Scientists have also discovered that using a foreign language reduces decision-making biases. Some experiments show that framing effect disappears when choices are presented in a foreign tongue. That probably happens because when you’re using your native language, your thinking is more intuitive. The moment you’re asked to reframe the problem in a different language, your brain comes out of the auto-pilot mode and it has to employ a deliberate mode of thinking. Kahneman calls it your system 2 – the rational, deliberate and slower mode of thinking.

Other remedies include looking at the problem from different vantage points [8] and also making provision for probabilistic thinking [9].

Conclusion

In his book Kahneman writes –

A remarkable aspect of your mental life is that you are rarely stumped … The normal state of your mind is that you have intuitive feelings and opinions about almost everything that comes your way. You like or dislike people long before you know much about them; you trust or distrust strangers without knowing why; you feel that an enterprise is bound to succeed without analyzing it.

This overconfidence in our intuitive abilities for making crucial decisions in work and life can do us in. The fact is you’re probably not as effective at making decisions as you could be. Nobody is.

But we can get better by learning about human behavioural quirks that can bring down the quality of our decisions.

Behavioural finance, the place where psychology meets money, is increasingly becoming a very important subject for everybody. It’s no more a thing academic interest for scientists. It’s mainstream now. The day isn’t far when awareness about human behavioural biases would become as essential as driving a car or using a computer.

If you’re reading this, I can say you’re already ahead in the game. Not the game of “who knows more” but the game where knowing few essential ideas go a long way in reducing errors and increasing the quality of life.

Take care and keep learning.