Imagine you are in the shop and you want to purchase healthy yoghurt (and let’s pretend that your definition of healthy is the elimination of fat). This is an everyday example of the framing effect. Key words: Investment decisions, prospect theory, framing effects, loss aversion, Nairobi Securities Exchange, Kenya Introduction Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the study of subsequent effect of markets (Aduda ,Odwour and Onwonga, 2012). Framing effect and questions. “We display risk-aversion when we are offered a choice in one setting and then turn into risk-seekers when we are offered the same choice in a different setting. Here are more examples of how framing leads to distorted interpretations: A medical procedure with a 90% chance of survival sounds more appealing than one with a 10% chance of mortality. Anchoring and adjustment is a cognitive heuristic where a person starts off with an initial idea and adjusts their beliefs based on this starting point. Moderators of Framing Effects 4.1. Framing bias is a type of cognitive bias where people were forced to decide based on the way the information is presented. If the real price of a good is $20, then selling it as $10 off a $30 good sounds better than a $5 surcharge to a $15 good. When information is provided in a favorable light, emphasizing the gains rather than the losses, people are more likely to avoid risks. More Examples: The Framing Effect. The framing effect refers to a bias of people having their decision influenced by whether options are presented with positive or negative frames. In both cases, the financial cost is the same for both options, but people are moved into action by the prospect of a penalty – rather than discount. You see two tubs of yoghurt. processes to explain the distinct types of framing effect. Do you believe the government should reduce spending on the national health service to increase spending on defence? Posted August 28, 2014 by Ben Carlson. Framing effect examples. How Framing Affects Investment Decisions & Outcomes. It applies to the world of finance as much as it does elsewhere. Regulatory Focus 5. To prevent framing,it is essential that investors and stock market participants be aware and knowledgeable of the specific effect. Bidirectional framing effect, a tradition al framing effect, drives to c hange risk preference when positive fram ing choices are transferred to negative framing choices . We make decisions that are influenced by the manner in which information about something is presented. Conclusion Glossary Bibliography Biographical Sketch Summary The framing effect is the finding that different descriptions of formally identical problems can result in different choices. Conversely, if the losses are emphasized, people will be inclined to take a risk to avoid the loss, even if the information is exactly the same. Risk Preferences in Different Task Domains Apparently, framing effects are not limited to specific decision tasks. Framing, similarto any other bias within the framework of behavioral finance, must be first identified and interpreted before it is controlled. 4. Specifically, describing the outcomes as gains Framing Bias is one of the main heuristics that influence decision-making and has the potential to wreck the businesses. Types of Valence Framing 4.2. In this study the author examines the dynamics of different types of framing effects in risky choice and the effects of task domains on the risk preference of decision makers. Q: Why is the framing effect important? Related to this idea is the framing of questions. FRAMING BIAS.