Bestiary of Behavioral Economics/Framing Effect

The framing effect is a cognitive bias in which diverging results tend to be produced from the same choice problem when being described differently.

Example

In their study, Amos Tversky and Daniel Kahneman propose an example to illustrate this. They provide a problem, and two different sets of choices.

Survey Question The United States is preparing for an outbreak of a disease expected to kill 600 people. There are two programs set forth to combat this disease. Pick one.

Scenario 1 Given this question, two choices were made available to the study group. In choice A, 200 people will live. In choice B there is a 1 in 3 chance that everyone will live, and a 2 in 3 chance that nobody will live.

Under these choices, most people were risk averse, and chose A to save 200 people no matter what. 72% chose A, while 28% chose B

Scenario 2 For a second study group, the same question was presented, but with differently worded questions. In choice C, 400 people will die. In choice D, there is a 1 in 3 chance that nobody will die, and a 2 in 3 probability that 600 people will die.

Under this second set of choices, most people acted as risk takers; they would rather take the chance on everyone living than on 400 people dying for sure. 78% chose D (equivalent of B), while 22% chose C (equivalent of A).

Results

In reality, each one of these four choices leads to the same expected outcome, so risk neutrality would suggest that there is no difference between which one is chosen. Choices A and C are identical, as are choices B and D. The way in which these questions are presented to an individual greatly affects the decision making process. This shows a weakness in the ability of individuals to make rational decisions. The Tversky and Kahneman study shows that individuals are risk seeking when the choice is between a certain loss and a potential larger loss, and individuals are risk averting when faced with deciding between a certain gain and a potential larger gain.

Significance

The use of framing effects can have significant implications on society in many ways. The way something is framed has been shown to alter expected utility. The Expected Utility Theory has four assumptions, one of them being invariance, which states that differing representations of the same choice problem should not affect choice. This broadly affects society in that any question can be presented in a way that encourages answers to the surveyor's preference. An example of this is that people are more likely to support an economic policy resulting in 90% employment rather than one that results in 10% unemployment.