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:
- Follow a goal-based investment approach, as part of a discipline & long term strategy for wealth creation
- When faced with important investment decisions, take some time to examine the question from different angles, and with different wording.
- 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.