Let’s say you were given fifty-fifty odds of either winning $8 or $32. Not a bad deal, but let’s also assume you were given a fifty-fifty chance of losing either $8 or $32.
You would think that either way you would feel pretty good about either option in the first set of odds and pretty bad about losing money in the second set of odds. Yet when this study was actually performed that’s not what happened at all.
The subjects actually felt slightly positive when they lost $8 because they avoided losing $32. But when they won $8 they reported a feeling of dissatisfaction because they didn’t win $32. They felt good about losing $8 because the gamble was framed in terms of losses and they felt bad about winning $8 because the gamble was framed in terms of gains.
This is what behavioral economists call framing. Framing refers to the fact that we tend to draw different conclusions from information depending on how it’s presented to us.
Another
example comes from a research study that shows how doctors can actually
change their patient’s mind about a surgical procedure based on how
they frame their diagnosis recommendation. Patient decisions were much
different when the doctor said “you have a 90% chance of survival”
versus “you have a 10% chance of mortality.”
More patients opted
in for the surgery when it was framed in terms of survival while more
opted out when presented with the mortality option. It’s the same exact
odds but just presented using a different point of view.Framing occurs frequently in the financial markets because it’s the ultimate playground for gains and losses. We constantly see comparisons of market and economic data today versus those in the peak years or those in the trough years. Morgan Housel had a perfect take on this type of framing:
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