Framing effect is a cognitive …

Framing effect is a cognitive bias in which an individual respond to the same choice differently depending on how it is framed.

Options can be framed either in a negative or positive way resulting in different choices for the same decision. There are three different ways of framing: attribute framing (a single attribute of an object is described in an equally positive or negative way), risky choice framing (choices are presented in terms of gain or loss) and goal framing (emphasizing on either the advantages or disadvantage of doing an activity). It has been observed that an individual usually opts for the risky option when presented with negatively framed choices and for the safe option when presented with positively framed choices. Framing effect as a significant role in how decision makers perceive given information and how they make judgements and decisions on it.The Expected Utility Theory states that an individual is most likely to rationally choose an option with the highest expected utility.

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It evaluates choices precisely with their respective outcomes and probability. Expected Utility is defined as the ‘expected utility value of one of several options found by calculating the sum of all the outcomes each multiplies by its probability’.

This theory states that a decision maker when choosing under uncertainty with risky options will compare their expected utility values and choose the option with the highest expected utility. There are four axioms that make a rational decision maker: Transitivity (All choices regarding a decision should be ranked according to preference), Continuity (among all different choices an individual prefers only one, showing consistency), Completeness (assuming an individual has a well-defined choice between all the options) and Independence (the preference of a choice between two is not changed even when a third choice is added). In the expected utility theory, an individual is assumed to choose the option with the highest utility that is the highest probability. It has been observed that this principle has been violated at many times, due to the certainty effect labelled by Kahneman and Tversky. According to the certainty effect an individual overweighs the possible outcomes which are sure or certain and have no risk. The preference of a sure outcome is known as risk aversion and the preference of a risky option or gamble is known as risk seeking. The Prospect Theory – An Analysis of Decision Under Risk, introduced by Kahnman and Tversky critiques the expected utility theory.

It states that people tend to be risk averse in a domain of gain or positive frame and risk seeking in a domain of losses or neagtvie frame. People make decisions and judgements depending on how they understand and perceive information. The Prospect theory also considers the two phases in decision making: framing or editing phase and the evaluation phase. The framing phase leads to the representation of the information, act and the outcomes of the particular choice problem. The reason to do the framing phase is to simplify the evaluation of the choices for the decision maker. A decision maker is less likely to second guess any of the options and tend to accept the framed options given to her. The evaluation process refers to the decision of choosing among options.

The Prospect theory also deals with loss aversion. People find it hard to adjust to losses and therefore the impact of losses is much more than any gain. So, when given options both presented in both ways, having the same result, an individual will choose the option with perceived gains. The probability of gains is perceived greater than that of the probability of losses. Unlike the Expected Utility Theory, in the Prospect theory outcomes are defined as gain or loss rather than final assets; also probabilities are replaced by outcome weight.The risk sensitivity theory suggests that an individual in a situation of need would opt for the high risk option, as the lower risk option would not satisfy the need. In such a case, if a risky option fulfils the needs of a decision maker then they would choose it regardless of the positive or negative frame.

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Research has indicated that a person in a situation of high need when presented with a negatively framed options is motivated to opt for the higher risky choice. In such situations an individual is looking to fulfils its need rather than maximise his/her chances of a certain outcome.The ‘Asian Disease Problem’ experiment conducted by Tversky and Kahneman in 1981 is one of the best known risky choice framing problem. The subjects were given a scenario where they had to pick between programs which provided a cure to the Asian disease expected to kill 600 people. The subjects were divided into two groups – one group was given a positive frame and the other a negative frame. All the programs had an equivalent outcome. It was found that the subjects presented with the positive frame chose the sure option and the subjects presented with the negative frame chose the gamble.

Thus, proving the point that in a negative frame decision makers are more likely to be risk seeking and in a positive frame risk averse. My study shall focus on the concept of how framing effect influences decision making under risk; a positive frame leads to a risk averse decision and a negative frame leads to a risk seeking decision. The aim of my study is to understand the framing effects on decision making.EXPERIMENTAL HYPOTHESIS: The framing (positive and negative) of a given decision with equivalent outcomes will result in ‘framing effect’.NULL HYPOTHESIS: The framing (positive and negative) of a given decision with equivalent outcomes will result in ‘framing effect’.