Framing Effect
The framing effect is a cognitive bias where people react differently to choices depending on how they are presented (framed), such as gains versus losses, even when the outcomes are mathematically identical.
Exam Tip
Framing effect = same info, different presentation, different decision. "90% survival" vs "10% mortality" = same but feels different.
What is the Framing Effect?
How information is presented affects decisions, even when underlying facts are identical.
Classic Example
| Frame | Response |
|---|---|
| "90% survival rate" | Positive reaction |
| "10% mortality rate" | Negative reaction |
| Same outcome, different perception. |
Investment Applications
| Positive Frame | Negative Frame |
|---|---|
| "80% chance of profit" | "20% chance of loss" |
| "Beat 70% of peers" | "Underperformed 30% of peers" |
Adviser Implications
- Be aware of how you present options
- Use consistent framing
- Help clients recognize their own framing biases
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Loss Aversion
Loss aversion is a cognitive bias where the psychological pain of losing is approximately twice as powerful as the pleasure of gaining an equivalent amount.
Anchoring Bias
Anchoring bias is over-reliance on the first piece of information encountered (the "anchor") when making decisions, even when arbitrary or outdated.
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