Framing Effects and Risk Aversion

(Much of this content is based upon Stanovich, K. E. (2009). What Intelligence Tests Miss: the psychology of rational thought. New Haven:The Yale University Press, a book that is highly recommended).

Framing refers to the way a problem is presented. Framing effects refer to the recipient of the frame taking the frame as focal. Consequently, all subsequent thought derives from this frame rather than from alternative framings. Alternative framings would require more thought. So framing effects are the result of cognitive miserliness.

Consider the following decision, call it Decision 1. Imagine that the United States is preparing for the outbreak of a disease that is expected to kill 600 people. Two alternative programs have been designed to combat the disease. Under Program A, 200 people will be saved. Under Program B there is a one-third probability that 600 people will be saved and a two-thirds probability that no one will be saved. Which program would you choose?

Most people choose Program A, the one that saves 200 people for sure.

Now consider another decision, call it Decision 2. Again imagine that the United States is preparing for the outbreak of a disease that is expected to kill 600 people. Again, two alternative programs have been designed to combat the disease. If Program C is adopted, 400 people will die. If Program D is adopted, there is a one-third probability that no one will die and a two-thirds probability that 600 people will die. Which program would you choose?

Most people choose Program D for Decision 2. Reexamine the two decisions. You should note that they are identical problems with different framings. Moreover, Program A and Program C are different framings of the same program. Programs B and D are different framings of the same program. So why are different decisions made depending on the framings of the decisions and the programs?

The answer can be found with respect to risk aversion. We are risk averse in the context of gains, but risk seeking in the context of losses. Consequently, people found the sure gain of 200 lives attractive in Decision 1 over a gamble of equivalent value. In Decision 2, people found the sure loss of 200 lives unattractive against a gamble of equivalent value.

© Douglas Griffith and healthymemory.wordpress.com, 2009. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

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