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.
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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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Related Terms
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on the first piece of information encountered (the "anchor") when making decisions, even when arbitrary or outdated.