F is for Framing

Framing is the idea that we make different decisions about the same thing when in a different mental state. The worrying thing about this being that other people - politicians, financial institutions and advertisers being prominent examples - can use this to influence our choices. Of course, such upstanding examples of modern society would never stoop so low, would they?

Example

We've already seen an example of framing in the disposition effect, where knowing that a holding is in profit or loss can cause us to behave differently. One study has shown that people who frame their portfolios narrowly - which basically means worrying about individual stocks - are more likely to succumb to the disposition effect than people who frame widely - those who view their portfolios as a single entity. But the effect is widespread - politicians frame debates, advertisers frame their marketing campaigns, financial institutions frame their past performance figures. I mean, who advertises that they've failed? But still it works ...

Causes

We don't usually view questions or decisions in isolation from their social context - so we tend to use framing to assess the meaning of what we're being asked. "I want some money" has a different meaning coming from your child than from a mugger, and confusing the two can have quite serious consequences. So overt manipulation of people through framing is probably just an extension of the way that we interact with each other on a social basis. Many framing studies involve asking the same question in two different ways and result in two different answers - but when asked to elaborate people can clearly figure out they're the same question, it's just that the way that they're asked invokes an expectation about what is really meant, as opposed to what is simply said.

Mitigation

Investors need to frame broadly rather than narrowly: if you worry overtly about specific stocks you either need to diversify more or get rid of those stocks and buy some you won't obsess over. De-biasing studies suggest strong warnings can cause people to take framing into account, so enforcing a rule that makes you think about disconfirming evidence before making a decision may help. But it's a nasty little bias, because it's a key social skill. Which may be why many very good investors have the social skills of a poorly trained cockroach.

And also: Investors, You've Been Framed
Read more: A Liberal Arts Investor's Reading List

The A to Z of Behavioral Bias