THE FRAMING EFFECT AND LOSS AVERSION

The framing effect is a cognitive bias where our choices are influenced by the way questions are framed, through different wordings, settings, and situations, people decide on options based on whether they are presented to them with positive or negative connotations; e.g. as a loss or as a gain.

This is based on the idea of loss aversion, where people strongly want to avoid losing. This means that to human beings, loss is more significant than the equivalent gain, that a sure gain is favoured over a probabilistic gain, and that a probabilistic loss is preferred to a definite loss. One of the dangers of framing effects is that people are often provided with options within the context of only one of the two frames.

A study by Tversky and Kahneman showed that, when they asked participants to decide between a treatment for 600 people who contracted a fatal disease which would result in 400 deaths. This was done with either positive framing (how many people would live) or negative framing (how many people would die). Treatment A received the most support (72%) when framed as saving 200 lives, but dropped significantly (to 22%) when framed as losing 400 lives.

Loss is more painful than gains are pleasurable, so people chose the safe course of action even though its illogical, lets take the ultimatum game as an example, where two people, say A and B are chosen and one of them handed a wad of money, A has to divide the money in any way he wants, and if B accepts it, then the money is divided, but if B rejects it, then neither of them get the money, now logically, whatever way A divides the money, B must accept it because he is getting something at least, that’s the rational choice, even if it is 99:1 but, this doesn’t normally happen, because if A doesn’t divide the money fairly and divides it in the ratio of, say, 80:20, B rejects it and neither get the money, this is because B sees a loss of 60 than a gain of 20.

The framing effect and the idea loss aversion can also be used to improve efficiency of employees. In a study, three groups of employees were taken, where the first group was given no bonus, the second was promised a bonus at the end of the year if they fulfilled and met certain goals, and the third was given the bonus upfront and were told that their bonus would be taken away if they did not meet the certain goals and objectives, it was noticed that after about a year, groups 1 and 2 worked at a similar level of productivity whereas group 3 had much better levels of productivity and better outcomes, this is because we as humans, hate losing, and in this case, the pain of losing a bonus is much more than the pleasure of gaining a bonus, even though its the same amount.

We also see the framing effect in action in our daily lives, where the same meat is marketed with 80% protein than with 20% fat. Buy one get one free offers are basically offers with double the price of the same good. We buy fat loss pills that are advertised as having a ‘20% chance of working’ and not as an ‘80% chance of not working’. Even though we know we’re being ‘ripped off’ or ‘scammed’, we still do it. Why? Because we humans, hate losing!