How the framing effect is used
Behavioral economics studies how things like the framing effect can change the decision-making processes. Scientists have found there are basically four ways that the framing effect is used:
- Auditory framing. Auditory framing includes not only framed information spoken out loud but also incorporates tone of voice to help influence the outcome.
- Visual framing. Colors, fonts, and even type sizes can also subtly affect how you feel about an offer or decision. You see this a lot in advertising.
- Body language. The body language of a presenter is hugely influential when it comes to framing. We trust and value the opinions of people with confident and friendly body language over a more neutral approach, even if what they have to say doesn't make sense.
- Value propositions. Value propositions are a classic way that advertisers frame offers, such as offering a discount in different ways. The rule of relatively large numbers also plays a part here. Would you rather buy a car with a $2,500 rebate or one with a 5% discount? What if they ended up being the same dollar amount?
How can you overcome the framing effect?
The framing effect can cause anyone a bit of a hiccup in their investing journey, but there are a few things you can do to override it. First, remember your investment horizon. A long-term investor doesn't act hastily because they have to hold on to that company for a long time. It's best to give it some thought before pulling the trigger.
Second, make sure you really understand the offer being presented to you or the choice you're being offered. Certainly, a 70% chance to win sounds better than a 30% chance to stagnate or worse -- but it's all the same. Do exactly what you'd do when finding an investment on your own and read all the information you can find on it, including balance sheets for stocks and prospectuses for things like mutual funds.
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