Framing Bias | Know Your Behavioural Biases: Part 6

Seeing the whole picture is something we’re frequently advised to do, in finance and other walks of life. It’s important to step back and look at the full picture – the problem is that our advanced human brains are often doing just the opposite of that.

To function in day-to-day life, our brains work hard to filter out all the information we don’t really need to know about. They do it visually, or we’d be distracted all the time. They do it aurally, because if we listened to all the sounds going on at any one time, we’d go mad. And they do it with our thought processes and decision making too.

But it isn’t foolproof. Sometimes the filters work against us, causing us to make decisions with important information missing or leading to decisions based on emotion or experience that don’t sit well with the context in which we’re working.

These biases are hard to spot, but they can be unhelpful and even lead to the wrong results. In this series we’re getting to the bottom of each one.

Framing is actually a really good example of the effects of not seeing the full picture. Have you ever faced an enormous project or goal that left you feeling overwhelmed? Renovating a house or building a business would be good examples.

Even something like running a marathon seems all the more implausible if we’re constantly aware of the whole distance. Framing helps us to take on seemingly insurmountable challenges by focusing on one step at a time until, eventually, the job is done. In this context, it can be a helpful assistant.

When is it harmful?

Framing gets tricky when we’re presented with information that, deliberately or otherwise, isn’t telling the full story. In Thinking, Fast and Slow, Daniel Kahneman defines the effects of framing as follows:

“Different ways of presenting the same information often evoke different emotions.”

For example, he explains how consumers tend to prefer cold cuts labelled “90% fat-free” over those labelled “10% fat”. By narrowly framing the information (fat-free = good, fat = bad, never mind the rest), we fail to consider all the facts as a whole.

Working with Amos Tversky, Kahneman designed a hypothetical scenario – an imaginary disease affecting 600 people. Two groups of subjects were given two sets of plans to choose from. Group 1 could choose Plan A, which would save 200 people, or Plan B, with a 1/3 possibility that 600 people survive, but a 2/3 possibility that no one survives. Group 2 were given Plan C (400 people will die) and Plan D, which offers a 1/3 chance nobody will die, but a 2/3rd chance that everybody will.

While Plan A and B are in fact the same (as are Plans C and D) Plans A and D were much more popular. That’s because of the way they were framed.

What that means for your investments

To achieve your personal financial goals, you need to do more than score isolated victories in the market – you have to win the war.

As UCLA’s Shlomo Benartzi describes in a Wall Street Journal piece, this demands strategic planning and unified portfolio management, with individual holdings considered within the greater context. Investors who instead succumb to narrow framing often end up straying off-course and incurring unnecessary costs by chasing or fleeing isolated investments.

Both sides of the coin, seeing the wood for the trees, looking at the whole picture – whatever your preferred analogy, working with an experienced, professional planner can help to make sure you consider everything when you make investment decisions.

 
Read Part 7: Greed Bias →
 

Keep bias at bay

It’s surprising how hard it can be to simply let things be. Knowing why we react in the ways we do is the first step to avoiding the counterintuitive actions that can damage what we set out to achieve with our investments.

You can download Making Better Decisions: Know Your Behavioural Biases in full today.

Carl Widger
Co-Founder & Director
Email: cwidger@metisireland.ie