Submitted By: Neha Rusia (088), Praveen

V.N (096)

FRAMING BIAS

Research Review Article

1. Effects of Framing on Measures of Risk Tolerance: Financial Planners Are

Not Immune (MICHAEL J. ROSZKOWSKI, GLENN E. SNELBECKER,
1990)

As per classical utility theory, people are generally classified either as Risk Averse
or Risk Seeking and generally they seem to be more risk averse. Risk Averse refers
to preference of a certain outcome rather than a gamble for the equal or higher
expected value, whereas Risk Seeking refers to avoiding certain outcome in
preference to gamble for similar or lower expected returns. Some of the basic tenants
of classical utility theory are under challenge by proponents of Prospect Theory
(Kahnemen & Tverskey). One of the important being most people are not equally risk
averse for both gains and losses. Most people tend to be more Risk Seeking while
faced with sure or probable losses whereas they tend to be more Risk Averse in case
of only certain or probable gains. Generally whether one considers it as a loss or
gain depends on their reference and can be described or framed as gains or losses.
Frames, once established, have been shown to be resistant to change (Levin, Johnson,
and Davis). The limits of the framing bias were explored in another study by Levin
and his colleagues (Levin, Johnson, Deldin, Carstens and Davis) in which subjects
reactions to one attribute versus two attribute gambles were compared. (A twoattribute gamble gives both the probability of the uncertain event as well as the
amount to be won or lost. In a one-attribute gamble, only one of these two elements is
presented).
Study
The data were collected from attendees at several financial planning conferences and
individuals undertaking courses in financial services. The sample consisted of 212
financial services professionals whose mean age was 41.86 (SD = 9.19). A majority
(70.81%) were male. On average (mean), they had 10.08 (SD = 8.94) years of
experience in financial services.
Imagine that your client has $6000 invested in the stock market. A downturn in the
economy is occurring. You have two investment strategies that you can recommend
under the existing circumstances to preserve your clients capital. If strategy A is
followed, $2,000 of your clients investment will be saved. If strategy B is followed,

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there is a one-third probability that the entire $6000 will be saved, and a two-third
probability that none of the principal will be saved.
Given this information, which of these two strategies would you favour? Place a
checkmark in front of your choice:
Strategy A
Strategy B
In the corresponding loss frame, the two possible strategies were described as
follows:
If strategy A is followed, $4000 of your clients money will be lost. If strategy B is
followed, there is a one-third probability that nothing will be lost, and a two-third
probability that the $6000 will be lost. The present study employed a non-repeated
measures design. (Each subject received only one of the four forms). At the bottom of
each form, the respondent was asked to indicate his or her age, sex, and years of
experience in financial services. (Names were not requested.)
Result and Conclusion
In addition to the two treatment variables (frames, ownership), three demographic
variables (age, sex, experience) as independent variables. The riskiness of ones
preferred choice (certain outcome or probable outcome) was the dependent variable.

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Three major observations evident from this graph are:o Gain frame condition is in favour of avoiding risk and Loss frame condition is
in the direction of taking risk.
o Older subjects are more risk taking under Loss frame, while dealing with their
own money.
o Financial planners are more Risk Averse while dealing with clients money.
From a practical standpoint, the present results contain both good and bad news. The
bad news is that financial planners are prone to the same framing bias that occurs with the
population-at-large, as well as members of some other professions studied so far, e.g.,
negotiators (Neale and Bazerman), buyers (Puto, Patton and King). The good news
conveyed by the results is that financial planners seem to be more cautious in how they
handle their clients money than their own money. This finding goes against the popular
notion that people are more risk-seeking with others money than with their own money
(cf. MacCrimmon, Wehrung and Stanbury).

2. Price-Framing Effects on the Purchase of Hedonic and Utilitarian

Bundles(UZMA KHAN and RAVI DHAR Source: Journal of Marketing
Research, Vol. 47, No. 6 (December 2010)),

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Bundling products is common marketing practice. Bundling is the practice of

selling two or more products in single packaging. Bundling can be related
products or unrelated products. In websites like Amazon.com, we can often see
bundling of unrelated items.
Method
Three hundred sixty participants from a national online pool completed a scenariobased study as part of a larger experimental session to win a $25 Amazon.com gift
card. They were asked to imagine they will buy 2 items X and Y and told they will
get a discount for X if they buy along with Y and vice versa but the discount price are
different.
Then created 6 combination using two hedonic (Ha = barbeque grill, and Hb = fondue
set) and two utilitarian items (Ua = office chair, and Ub = printer), and also formed
six, two-pair bundle combinations: two homogeneous bundles pairing only hedonic or
only utilitarian items (HaHb, UaUb) and four heterogeneous bundles pairing one
hedonic and one utilitarian item (HaUa, HaUb, HbUa, HbUb). This study had a 3
(discount frame: no discount, discount on Item 1, discount on Item 2) x 6 (bundle
composition: HaH5, UaUb, HaUa, HaUb, HbUa, HbUb) design. Participants
indicated their likelihood of buying the bundle on a nine point scale (1 = "not at all
likely," and 9 = "very likely")

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Together, the results demonstrate support for the proposition that in heterogeneous
bundles discounting, a hedonic item is more effective in increasing bundle purchase
likelihood than dis counting a utilitarian item, whereas framing an equivalent discount on
different items does not affect purchase likelihood in homogeneous bundles and also
tested whether discounting a hedonic product in heterogeneous bundles is more effective
in increasing the purchase likelihood of a bundle than discounting the same hedonic
product in a homogeneous bundle. This study shows the behaviour customers in product
bundling and also talk about the framing effect when they are shown in different prices
with homogenous bundling and heterogeneous bundling and this study also shows bias of
customers when items price are bundled and framed in different ways.
3. How Consumers are affected by the Framing of Attribute Information
Before and After Consuming the Product (Irwin P. Levin and Gary J. Gaeth
Source: Journal of Consumer Research, Vol. 15, No. 3 (Dec., 1988), pp. 374378)
These researchers defined framing effect in the context of choice under uncertainty,
where the choice between two alternative actions was shown to reverse, depending on
whether attention was focused on the potential gain or the potential loss associated with
each alternative.
Method
Took a sample of people and were told about the description of the beef and asked them
to rate. Half of the subjects in the "taste after labelling" condition were told that they
would be given a taste of "7 5% lean ground beef" while the other half were told that they
would be given a taste of "25% fat ground beef." After tasting the meat, they were given a
response sheet for expressing their reactions. People in the "taste before labelling"
condition were not told the "%-lean/%-fat" information until after they tasted the ground
beef. Half of these subjects were then told that the meat they had just sampled was "75%
lean" whereas the others were told that it was "25% fat." They then were given a response
sheet.

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Results
Individual test has shown framing effect is significant in the results given above. The
main difference were seen in fat/ lean beef testing and least difference is seen in good and
bad quality .Alternate labelling of the attribute in positive or negative terms did affect
consumers' evaluations even when they actually consumed the product. On the other
hand, the labelling or framing effect was reduced when consumers sampled the product
as compared to when they did not. The framing influence of attribute labels, even when
consumers can rely on their own experiences, serves to validate the information framing
effect found in previous studies in which subjects evaluated hypothetical purchases
(Bellizzi and Martin 1982; Levin et al. 1985). Ac- cording to this model, the effect of any
one source of information is decreased when it is combined with another source of
information, because the two sources of information available to the judge are balanced
in arriving at an integrated impression.

4. Different Scales for Different Frames: The Role of Subjective Scales and
Experience in Explaining AttributeFraming Effects (Chris Janiszewski, Tim
Silk and Alan D. J. Cooke)
If attribute framing does influence the reference sets used to evaluate an attribute value,
then it should be possible to reverse a framing effect wherein positive frames are
evaluated more favourably than negative frames in some situations, but negative frames
are evaluated more favourably than positive frames in other situations.
Method
At first screened the products using three additional criteria. First, subjects had to infer
that the product consisted of only these two ingredients and that increasing the amount of
one ingredient (e.g., meat) resulted in a decrease in the complementary ingredient (e.g.,
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tomato sauce), given a constant volume. Second, the feature ingredient had to be
perceived positively (e.g., increasing the percentage of meat in meat pasta sauce is
valuable) and the filler ingredient had to be perceived negatively (e.g., increasing the
percentage of tomato sauce in meat pasta sauce is negative). Third, the product had to be
commonly promoted in terms of the feature ingredient
Thirty-seven pre-test subjects were asked to identify the preferred ingredient for each
two-ingredient product, ensuring that one ingredient was more positively perceived than
the other. An average of 88% of the subjects selected the featured ingredient as the more
valued ingredient in each product.
Results
The higher-order interactions between the framing counterbalance factor and the
treatment variables were all statistically non-significant. The results of experiment show
that, counter to existing demonstrations of attribute framing in the literature, it is possible
for negatively framed attribute information to be evaluated more favourably than
positively framed attribute information.

5. Framing Effects and Financial Decision Making (Michal Panasiak and Eric
Terry)
Levin, Schneider and Gaeth (1998) have classified framing effects into three major
types: risky choice, attribute and goal framing. Hallahan (1999) also classified framing
into different types. His classification included seven varieties differing in what is
framed: situations, attributes, choices, actions, issues, responsibility, and news. Various
other types of framing biases identified and classified after these includes-number size
framing and framing risk in either absolute or relative terms.
Attribute Framing
In this type of framing, only single attribute is subjected to framing manipulation. By
attribute framing the decision of subject varies as according to the kind of framing done
as Positive or Negative. For example, ground beef that was labelled as 75% lean received
better customer reviews than the same ground beef that was labelled as 25% fat (Levin &
Gaeth, 1988). The participants in the study were asked to rate the beef on a 1 to 7 point
scale with 7 being the best score and 1 being the lowest score. The option with positive
connotation received the average scoring of 5.31 whereas the negative implication
received the score of 2.32. Thus the outcomes of the different studies of attribute framing
can be described as finding that if an attribute is framed in positive terms the product or
event receives a more positive score than if the same attribute is framed in negative terms
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(Levin, Schneider, & Gaeth, 1998). A financial advisor might use this bias to highlight
the potentially large returns that one could earn investing in a very risky security so as to
make it more lucrative for particular investor or conversely highlight the potentially large
losses that one could suffer by investing in a particular security to distance the clients
from the same.
Framing Risk in Absolute or Relative Terms
This type of framing bias is closely related to attribute framing. In this framing bias the
magnitude of gain or loss is determined by the type of description i.e. whether in relative
term of percentage or in the absolute numbers. The study reveals that most people prefer
relative numbers than absolute as they tend to compare it better with a base when
expressed in relative terms. Framing risk in absolute or relative terms can be applied to
financial investments involves the opportunity to hedge risk using derivatives.
Number Size Framing
This framing is also related to attribute framing. When individuals are subjected to
number, people often tend to assign more significance to differences between smaller
numbers than to the same differences between larger numbers. It can be utilized to frame
a product or event that has multiple attributes in a more favorable or less favorable light.
When conducting a break-even NPV analysis on two capital budgeting projects during
simulation analysis, the two projects might seem to have equal risk if one has a 90%
probability of breaking even whereas the other has a 95% chance of breaking even. The
5.26% difference in probability of the two projects being profitable might not seem like a
deal-breaker. On the other hand, if the chance of failure to breakeven was instead
highlighted, a difference in the probability of not breaking even of 5% vs.10% might be
considered a very significant difference in risk between the two projects.

SUMMARY
As the literature review of the above research papers suggest that not much of the study
has been done on Framing bias with respect to financial markets and it impacts the
customers more in a way the person wishes to market itself. As we cannot replicate the
study, it does not imply that the bias do not exist and from the managerial point of view,
this bias can be identified and used by portfolio managers to influence their investors.
To test the biases and their extent of impact on individual one can use the Mayers Briggs
measures subjects on four different personality continuums to give each person a
personality profile. The measurement continuums are: E Vs. I (Extrovert vs. Introvert; S
vs. N (Sensing vs. Intuitive); T vs. F (Thinking vs. Feeling); J vs. P (Judging vs.
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Perceiving) (Larsen & Buss, 2008). The ESTP personality type appears to be the most
overconfident and the least risk averse, on the opposite end of the spectrum is the INFJ
personality profile is the least overconfident and the most risk averse. It depends on the
interaction between the two parties, and the mutual understanding of the biases among
them which persists knowingly or unknowingly and it depends on either parties to use
them for their benefits.

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