Framing 1, Facts 0?

When we make decisions, we often take the way they are presented to us at face value. Maybe a sales person offers you a menu of investment options or maybe a single recommendation; either way, you can bet a lot of thought went into the architecture of the choice presented to you.

Amos Tversky and Daniel Kahneman, the fathers of behavioral economics, wrote in “The Framing of Decisions and the Psychology of Choice” in 1981, that the way decisions are presented can drive our decisions as much as the facts themselves. They can even drive us to irrationality, that is, decisions that are not in our best interests.

Their famous example puts you in the shoes of a policymaker faced with an awful dilemma: a deadly disease has been discovered that is expected to kill 600 people and there are two programs, X and Y, available to combat the disease. The table below has two equivalent framings of the decision.

In both framings, option 1s and option 2s are equivalent. Would you make the same decision in each formulation? The experiment showed that the mere presentation of the facts was very influential:

• The experimenters designed Framing A to encourage risk-aversion. People normally don’t like taking risk. When the decision is presented in the context of saving lives, obviously a benefit, people will try to limit risk and 72% of experimental subjects chose option 1.
• They designed Framing B to encourage risk-taking.  It’s well known that people perceive losses twice as acutely as they do gains. We will take extreme measures and unfair gambles to avoid losses. So, 78 percent of subjects presented with Framing B chose option 2, hoping to avoid any deaths.

We at Decision Fish are using findings of behavioral economics like these to design helpful (and ethical!) consumer financial decision tools that will soon appear at www.decisionfish.com. We will:

• “Nudge” people to borrow responsibly by highlighting the savings and other benefits that will result from not borrowing to much;
• Help users avoid riskier choices by comparing the alternatives’ downsides. For example, clarifying and comparing risk can discouraging over-borrowing and complex, costly or opaque financial products;
• Encourage the selection of more prudent alternatives by anchoring the status quo in a positive light. If you’re coming from a position of confidence and success, you may feel less inclined to gamble on risky alternatives to make up for prior losses or mistakes;
• Promote timely mortgage refinancing by emphasizing how refinancing eliminates the risk of interest rates rising, which would reduce or eliminate the benefit;
• Encourage the appropriate use of ARMs for mortgages and equities for long-term investment by explaining how other options can be unnecessarily expensive and even riskier;
• Frame choices in terms of how they contribute to overall wealth, rather than changes in wealth, to promote holistic, long term thinking; and
• Encourage the user’s empathy with their future self for a longer-term perspective on future feelings.

As we mentioned before, framing, as a type of choice architecture, has important ethical dimensions. It requires empathy and deep respect for the user. Will you help to “keep us honest”? Sign up here to be a beta-tester and help us understand the challenging financial decisions for which you would like unbiased and objective support.

“Man is fully responsible for his nature and his choices”
–Sartre