Framing Bias

The Issue:

The way in which information is delivered to us can influence how we perceive it and ultimately how we act on it. Through research, we know that people prefer a sure gain to a possible gain frameand a possible loss versus a sure loss. In decision-making, one aspect of the choice is highlighted in such a way that it intentionally or unintentionally sets out to sway selection.

We are all familiar with a sales pitch meant to highlight the benefits of the purchase and disregard the negatives. Making an investment is no different. In fact, research has found that older adults may be more susceptible to framing effects due to well-developed emotional frames and immediate reactions to gains and losses (Thomas, A.K. and Millar, P.R. (2011).

The Solution:

Whenever you find yourself in a situation where you are making an investment decision, consider two approaches. Firstly, write down an exhaustive list of the advantages and disadvantages of the prospective investment. Secondly, for each statement about the investment, write the opposite or alternate way it could be stated. For example, “the portfolio has a 30% expectation of growing by 7%” could also be stated as “the portfolio has a 70% expectation of growing by less than 7% or decreasing in value.” These two approaches will help recalibrate your perception of the opportunity so that you can make a more sober decision.

Tags: , ,

Get in touch

CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.

Disclaimer