Framing effect is a behavioral concept in which people react differently to two identical proposals depending on how they are presented.

The framing effect is a bias, in which people’s decision for two identical options differs depending on whether it is presented as a loss or as a gain; People tend to avoid risk when a positive frame of two identical options is presented.

Framing effect in investing:

Mr. Jay Shah was presented with two investing options.

Option A: XYZ product invests 60% of your principal in risky asset.

Option B: ABC product invests 40% of your Principal in comparatively safer product.

Which option will you choose??? Option B right because though both the products state the same investment objective one would preferably choose option B with an intention to avoid risk.

Thinking Man Advises, following ways to evade framing effect on financial decision making:

  1. Follow a goal-based investment approach, as part of a discipline & long term strategy for wealth creation
  2. When faced with important investment decisions, take some time to examine the question from different angles, and with different wording.
  3. Aware of words / points that are emotionally laden while choosing an investment options. As, these have the strongest influence on our decision making while investing.