… the Framing Bias. 
This is another beautiful mental shortcut that we use to solve common problems.
Although this heuristic speeds up processing in our brain, it occasionally makes us think so fast that we miss what is important.
When heuristics work, they help our brain stay frugal, but when they don’t, we see the world as a much simpler place than it really is.
Some heuristics are learned, while others come free with every copy of the human brain. This heuristic comes as a freebie and has tricked me so often in the past that I am almost tempted to award it one of those prestigious life-time Tacomob-Memberships for free.
The Framing Effect makes us draw different conclusions from the same information, depending on how or by whom that information is presented.
In other words, when we are given an opportunity to make or lose money, our decision can be pulled one way or another, like a lump of silly putty, just by a minor change in context or description.
For example, a study asked more than 400 doctors whether they would prefer radiation or surgery, should they become cancer patients themselves.
Among the physicians who were informed that 10 out of 100 patients would die from surgery, 50% said they would prefer to be treated with radiation. Among those who were told that 90 out of 100 patients would survive surgery, only 16% said they would choose radiation.
Are doctors really that bad in interpreting statistics?
I suppose, in their defence, one could say that those doctors are highly specialized in their field and should be excused for falling for that mathematical trick question.
Ok, but what about this case then?
Most employees are happier with a 4% raise, when inflation is running at 3% than they are with a 2% raise, when inflation is zero.
Why is that?
Because 4% is twice the size of 2%; it “feels” better, even though what really matters is how much of it would be left after the rising cost of living.
But, of course, this does not apply to you, right? Perhaps this sounds more familiar?
You invest 1% of your money into a single stock that goes to zero and you get very upset. But when your entire portfolio losses 1% of its value, you shrug it off as a routing fluctuation. Yet the effect on your total wealth is identical.
Once again, we can thank our brain for the above “thinking blunders”. Our brain always seeks to reach decisions in the easiest possible way, with the lowest emotional cost, and the least mental effort. Our brain is somewhat lazy.
When we make decisions, we tend to balance how much we need to think about an alternative, against how much we stand to lose. And when our brain has to work this hard, it’s the emotional stakes that tip the balance.
Here are two scenarios:
- I give you $50. You now must choose between
- Keeping $20 for sure, or
- Taking a gamble with a 60% chance of losing $50 and a 40% chance of keeping $50.
- I give you $50. You now must choose between
- Losing $30 for sure, or
- Taking a gamble with a 60% chance of losing $50 and a 40% chance of keeping $50.
You probably see that the two situations are identical, although they don’t feel identical. That’s because the first frame focuses your attention on how much you keep, while the second, on how much you lose.
Neuroscientists in London recently scanned people’s brains while they faced those choices. Thereafter, the participants said that they had easily figured out that the alternatives were the same and they also insisted that they had split their responses 50/50, between the sure thing and the gamble. Sadly, that wasn’t true.
In the first frame, they had gone for the sure thing 57% of the time; in the second, they gambled on 62% of the trails.
When those participants avoided the gamble in the first frame and took it in the second, neural activity surged in the amygdala, suggesting that this fear center in the brain was steering them away from the perceived danger of loss.
The amygdala apparently responds, like a very blunt instrument, only to the crude difference between “keeping” and “losing”.
It takes the Pre-Frontal Cortex of the brain to figure out the more subtle fact that all the choices are the same.
By playing up the emotional aspects of framing, Wall Street’s marketers, as well as all other marketers, can keep our amygdala firing, thereby preventing our reflective brain from intervening.
Our “risk tolerance” is supposed to be an integral part of our personality; nevertheless, it can easily be transformed by an embarrassingly basic twist in the wording.
That’s why every investor must be eternally vigilant against the dangers of framing and exit from that bias.
So, how can one find that exit?
Well, one could try the good old comparison method. ‘Comparison and Contrast’ is a tested concept of trying new ideas out, of finding related memories and exercising constructive skepticism with your reflective brain, and then coming up with a rational decision.
It’s always best to think before believing.
“BRAIN, n. An apparatus with which we think that we think.” — Ambrose Bierce