Behavioral finance FAQ / Glossary (Framing)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Frame (dependence, effect) /
   Framing (bias)

 


00/9i,12i - 01/3i - 02/8i - 03/2i,12i -
05/11i - 06/8i,11d + see
(limited)
heuristics, representation, perception,
rationalizing, manipulation,
reductionism, neuro-linguistic,
tunnel vision, selective+ bfdef2

Myopic vision, and from one angle only.

Definition

Framing - or more precisely mental framing /
cognitiveframing
is:

A selective / reductive /
excessively narrow way

by which a question or information used to take a
decision is
expressed, presented, worded, formulated,
categorized, pictured
.

 

A framing is done by:

The decider
itself
(an investor
for example).

Or outside
parties
(medias, advisors,
suppliers...)

Framing designates his/her
selective perceptions and
representations

(see those words) of realities
and issues.

They feed the decider
with
a selective
formulation

that disseminates their own
(in
some cases manipulative)
picture of things.

Examples

Scan the words or the picture
and find the
language or painting trick!

3 dollars a day seems less costly than 1095
    dollars a year.

Saying "there is 50% chance of success" instead of

"50% chances to fail"could change a decision (the famous
half-full or half-empty glass).

Qualifying a political move as "liberal" or

"conservative" closes further analysis and rigs decision making.

Calling a house a "cottage"; or a "villa" gives a different

idea of its market value.

Find what is missing in the picture!

Some framing are due to

- pure reasoning errors, logical fallacies, confusions,

- bogus information or knowledge that sneakily infiltrated the
   memory at one time or another.

=> Then, our decisions, use mixed up or misunderstood notions or facts.

      Here are two examples

An economic / financial one is the frequent confusion
    between
the nominal return rate and the inflation-adjusted

 ones: see "money illusion".

Another one is comparing a fund performance with a market
   index.

This neglects the fact that such indexes do not include dividends,
thus they need to be adjusted (*) before using them as investment
performance references.

(*) Strange that index publishers do not issue such adapted
      stats at least periodically.

Too much work? Or technical problems (tax adjustments..)?

Or no taste for transparency?

The framing bias

Blanking all parts of the Universe
that are outside the frame
.

Framing becomes easily a damaging mental bias, which distorts the
perception and analysis
of an issue
and the whole decision-
making
process.

The framing bias gives a selective (framed) and
simplistic picture of reality
.

This leads to flawed decisions with unwanted effects.

This has some relation with (see heuristic) :

- representativeness heuristic in which we take simplified stereotypes
  as models,

- and availability heuristics such as our first perception / interpretation
  of things, or the memory of a recent event or data seen as similar, but
   often unrelated or irrelevant, that jumps into the mind.

Biased mental frames can result from:

A kind of cognitive myopia (see tunnel vision),

a narrow mental selectivity (selection bias)

Or a representation that is deliberately

reductive, manipulative , one-sided,
partial, truncated, non-neutral .

Nice description, thanks my ...friend (?) !

But what did you leave out of the frame?

The decider might frame the issue because of simple inattention or incomplete
information.

But also its prior beliefs, choice criteria, analysis models might be overly
selective, framed, biased, limited.

How framing is done

To "frame" an issue is:

Either to narrow its definition or its presentation, by
   selecting
only one aspect instead of looking at the big picture.

("the tree hides the forest")


Or to give a biased presentation or formulation that

diverts the attention towards an intentionally highlighted specific
or one-sided interpretation.

("the half empty or half full glass").


Or to take a narrow approach of the objectives and
   criteria
at stake in the issue.

(for example, an investment decision can be different if the
analysis
focuses on the loss prospect or on the contrary on
the gain prospect)

Mental frames are quite often linked to the language
used
(see neuro-linguistic), for example to stress the
positive or
negative aspects with adequate ...or biased
words
.

Watch what words (*) are used, a word can cover a narrow
and oversimplified notion, that might close one of your
mental windows.

Not only the facts presented or selected, but also the
vocabulary used,
can play an important part in
framing.

Also other communication tools might overwhelm the words

and change the understanding, such as:

* The data, charts, pictures   that are shown,

* The external attitudes used,

As a trite example, everybody knows the influence given by how
wares are presented in a shop windows, or by how somebody is
dressed.

Framing and wording are brothers, but framing and dressing
are cousins.

The consequences

Deciding with blinders.

To use narrow, selective (or wrong) data, explanations, ideas and approaches
abouteither an issue (i.e. stressing gains or losses) or the facts themselves :

Thwart the ensuing reasoning, conclusions and decisions (for example
   invetment decisions),

As a common example, gives usually a too favorable or too unfavorable
    impression
(positive or negative framing),


Those flawed decisions bring dubious, damaging or at least "anomalous"
practical effects.

Origins of framing

Framed from the outside or from the inside.

Framing can have two distinct origins as it can be either an outside misinformation
(external framing) or a personal cognitive bias (internal framing):

An external framing is the way information is given
    to the decider
by the media, an adviser, its social group, etc.

External framing can be:

Either done involuntarily, sometimes because of pure
    incompetence from the author,

Or launched voluntarily by the "informer(s)": see manipulation,
    deception, neuro-linguistic.

Some hypes or demonization are made by using
     rewording
rhetoric, neuro-linguistic tricks, slogan,
     newspeak 

This uses more emotional words, either more negative
or more positive ones, and disguises the truth.


An internal / personal framing is done by the decider itself.

It can be:

Either occasional, accidental

(lack of attention, tunnel vision, but also emotional situations that 

block the analytical mind),

Or a result of the habit to look at information from a single angle,

sometimes as a form of heuristic: see that word.

Here two sub-possibilities:

1) either the person is driven by its own individual cognitive
   or emotional bias,

2) or the habit is shared by a whole group or 

population, as a result of social learning (see that word).

In the last case there is a joint phenomenon of internal and
external framing as seen below.

 

Most people are "frame dependent"

They limit their approach to one angle (tunnel vision).

They select only one way (usually the one that is immediately
apparent or that fits their one-sided beliefs)

* to define the questions they ask themselves

* or to build their decisions (see limited heuristics, rationalizing).

Their narrow definition of the question, or the limited scope of
their research, thwarts their response.

The risks of framing biases,
     and where to detect them

Limited vision and truncated maps
might impair your decisions
when driving your life...
...or when opening your wallet.


In many life circumstances this narrow approach, mental oversimplification,
one-sided representation, simplistic labeling, can cause wrong decisions.

To find a flurry of examples of misleading presentations, look at :

Most political slogans, incantations and discourses, and notably
    at electoral debates.

How advertising shows things(here it is candid, people know
    that ads aim at selling).

Religious mantras and decorum.

Technical words, buzzwords and catchphrases.

The artistic and intellectual concepts of the month (here we havze
   
"reductionism").

And so on,
    as we could also talk about the use of framing in interpersonal 

communication, in the family, at school, at work....

Framing biases in economics and finance

Framed money

In money management and in economic and business behavior, there is a
strong risk to follow unconsciously, individually or collectively, some red
herring
, which leads to business or market inefficiencies.

All what is said above applies, but specific cases regarding those areas can
be added:

Narrow framing means people overlook the longer view and focus
     their perception on the immediate future.

Here are two examples of this "short term bias":

1) Most people would not spare enough money voluntarily for
    their old days.

This is one of the reasons why putting money in pension 
     schemes
is usually mandatory.


2) Many people  overemphasize the  short term risk.

They would prefer assets with a low return (seen as safer),

even when they save for the long term.

Practically, they would choose placid savings accounts or
government
bonds rather than stocks.

Stocks are assets with (in average) a higher long tem return but
they fluctuate more and can cause a momentary loss, thus they
often suffer an aversion whatever the opportunities (see equity
risk premium puzzle).

Of course, when assets are overpriced (bubble), and as "long term"
is sometimes decades, it becomes then rational to park one's egg
nest in low return, but liquid and safe investments.

It is advised to use a "wealth frame" for investment
     decisions.

This means to take into account all your present and expected wealth
(assets, debts, expected charges and revenues) so as not to focus on a
too narrow aspect of our financial situation (see mental account).

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This page last update: 06/09/15

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