Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Framing Effects and Financial Decision Making
Michal Panasiak and Eric Terry
The framing effect is one of the most widely recognized cognitive biases
and can plague decision makers in a myriad of situations. This paper
reviews three types of framing: attribute, absolute vs. relative and
number size framing. It then shows how each type of framing could
potentially influence financial decision making in realistic financial and
corporate investment scenarios. The paper briefly discusses both how
these framing effects could be exploited by marketers and the need for
debiasing strategies in order to help people arrive at sound financial
decisions.
Field of Research: Behavioral finance, framing, investment management
1. Introduction
Traditional models of financial decision-making assume rational investors who seek to
maximize expected utility. However, there is a large and continually growing literature
that shows that human decision-making is significantly influenced by a variety of
cognitive biases (Ariely, 2008). An implication of this literature is that the way in which a
problem is presented will have an influence on the way that a individual reacts to the
problem, which in turn will change the way in which this problem is perceived (Wood &
Bandura, 1989).
Framing is one of the most well-known cognitive biases. A number of different types of
framing have been identified. 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. There have been several other types of framing discovered
after these classifications had been developed. This includes number size framing and
framing risk in either absolute or relative terms.
The risky choice framing effect is the tendency for individuals to be risk averse when
uncertain outcomes are framed positively but risk seeking when they are framed
negatively (Tversky & Kahneman,1981). This is one of the foundational assumptions of
Prospect Theory (Kahneman & Tversky, 1979). Prospect Theory has been used to
analyze financial decisions in a number of published papers (cf. Barberis, Huang, &
Santos, 2001; Shefrin & Statman, 1985).

Mr. Michal Panasiak, Ted Rogers School of Management, Ryerson University, Canada.
Email : michal.panasiak@ryerson.ca

Dr. Eric Terry, Ted Rogers School of Management, Ryerson University, Canada.
Email : eterry@ryerson.ca
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
In contrast, the implications of other types of framing for financial decision-making have
remained unexplored. The purpose of this paper is investigate how three of these other
types of framing - attribute framing, number size framing and framing risk in either
absolute or relative terms - could potentially influence investment decisions. This will be
done both for financial investment decisions and for corporate investment decisions
(capital budgeting decisions).
2. Literature Review
The essence of the framing effect is well summarized by Entman (1993): "Framing
essentially involves selection and salience. To frame is to select some aspects of
perceived reality and make them more salient in the communicating text, in such a way
as to promote a particular problem definition, causal interpretation, moral evaluation
and/or treatment recommendation for the item described" (p. 55). There are a number
of different types of framing. Three of these are attribute framing, and framing risk in
either absolute or relative terms, and number size framing.
2.1. Attribute Framing
Attribute framing can be described as the simplest form of framing. In this case, only
one single attribute is subject to the framing manipulation. With attribute framing, a
product or event receives different reviews when this attribute is framed in a positive vs.
negative light. For example, ground beef that was labeled as 75% lean received better
customer reviews than the same ground beef that was labeled 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. When the beef
was described as being 75% lean, the average rating attributed to it was 5.15. When
the beef was described as being 25% fat, the average rating attributed to it was 2.83, a
2.32 point difference between the positive vs. negative frame. Similarly in the cases of
medical procedures, where the surgery or treatment is described in terms of success
rates as opposed to failure rates, the same procedures get significantly more positive
reviews with the former rather than the latter (Marteau, 1989; Wilson, Kaplan, &
Schneiderman, 1987). Risk is not an essential element of attribute framing. For
example, Levin (1987) asked participants to rate the performance of a basketball player
based on the player’s shooting percentage. Some people were presented with
information about the player’s success rate of making baskets, whereas other people
were presented with the player’s failure rate of making the same baskets. The people
who had the information on the player’s success rate tended to give the players much
more favorable scores than were people who were presented with the failure rate. Even
though there was no element of risk present in rating the player, the attribute framing
effect still held.
In general, 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 (Levin,
Schneider, & Gaeth, 1998). Based on the large number of papers on attribute framing
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
that have been published in consumer research journals, marketing specialists have
been very willing to make use of this framing effect to influence consumer perceptions
of products.
2.2. Framing Risk in Absolute or Relative Terms
This type of framing is closely related to attribute framing. The size of a possible loss or
gain can differ substantially depending on whether it is presented in absolute or relative
terms. Consequently, preferences between two alternatives can be influenced whether
the potential outcomes are presented to a person in relative terms – as percentages - or
in absolute terms – actual numbers.
In a medical field study, it was shown by Malenka, Baron, Johansen, Wahrenberger and
Ross (1993) that even if faced with the same degree of risk patients preferred to choose
a hypothetical treatment option if it was presented to them in relative terms as opposed
to absolute terms. The participants were presented with the following hypothetical
scenario describing a disease which had a 10% mortality rate.
Suppose you have a serious disease that needs to be treated with medication.
Your risk of dying over the next year is 10% if you don't receive treatment. There
are only 2 possible medications for the disease: Medication A and Medication B:
They cost about the same and have almost no side effects. Your doctor provides
you with the following information about these medications:
Medication A: If you take this medication it will decrease your risk of dying by
80% (four fifths) over the next year.
Medication B: If 100 people with the disease, like you, take this medication 8
deaths can be prevented over the next year.
Question: Which medication do you want?
Even though both options delivered the exact same results and the patients had all
relevant information that would allow them to convert the relative risk into absolute risk
and vice-versa, most patients appeared to not do this. Instead the 56.8% of
respondents preferred the ‘relative’ treatment option (medication A), 14.7% preferred
the ‘absolute’ treatment option (medication B), 15.5% responded that they had no
preference and 13% stated that they couldn’t decide. The same study asked a control
question in order to measure people’s ability to convert a number presented in relative
terms into absolute terms. The study showed that most people were not able to do this
even if provided with all relevant information needed to do it.
2.3. Number Size Framing
Number size framing is also related to attribute framing. When individuals are
presented with a number, people will often assign more significance to differences
between smaller numbers than to the same differences between larger numbers. This
phenomenon can be utilized to frame a product or event that has multiple attributes in a
more favourable or less favourable light.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
For example, Wong and Kwong (2005) asked participants to choose between two
different stereo systems, based on two attributes of that system – compact disk (cd)
changer capacity and sound quality. The first stereo system had a cd changer capacity
of 2 cd’s and had the sound quality framed with either a small number as signal
distortion of .003% or a large number as signal delivery of 99.997%. The second stereo
system had a cd changer capacity of 10 cd’s and had the sound quality framed with
either a small number as signal distortion of .01% or a large number as signal delivery
of 99.99%. When sound quality was expressed using small numbers, 70% of people
preferred the first stereo system. In contrast, when sound quality was expressed in
larger numbers 60% of respondents instead preferred stereo system B. Thus, the
difference in sound quality between the two systems appeared much more significant to
respondents relative to cd capacity when framed in terms of small numbers than in
terms of large numbers.
Significant preference reversals were also found in a variety of other situations including
conditions where peripheral information, evaluation modes and evaluation scales were
changed. In addition a preference reversal due to number size framing may take place
even when decision makers are faced with an opposing risky choice framing effect.
Depending how the numbers describing attributes of different choices are presented,
individuals may be comparing two tiny giants or two giant dwarfs. In these situations,
individuals will shift their preferences from one choice to the other depending on the
size of the numbers, with differences between smaller numbers given more importance
than the same differences between larger numbers (Wong & Kwong, 2005).
3. Potential Applications to Investment Decision-Making
3.1. Attribute Framing
Attribute framing in financial investment scenarios can be seen during every day
interactions between financial institutions and retail, small scale investors. Banking
institutions generally try to steer clients towards particular financial products by
highlighting their positive features and away from alternative investments by highlighting
their negative features. As an example, they might highlight the potential return that
one could earn investing in a security and downplay the potential loss that one could
suffer investing in the same security. Consider an investment advisor emphasizing that
a particular bond has a 99% chance of paying its promised yield makes the default risk
of the bond less noticeable or important to the client than if the bond was described as
having a 1% chance of default. It is hypothesized that this would make the client more
likely to invest in this bond.
As another example of attribute framing influencing a financial investment decision, a
financial advisor might highlight the potentially large returns that one could earn
investing in a very risky security in order to make it appeal to particular clients or
conversely highlight the potentially large losses that one could suffer investing in the
same security in order to talk clients away from investing in it.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
When making corporate financial decisions, firms compute the net present value (NPV)
of a potential project so determine whether the project adds value (i.e. has a positive
NPV) or subtracts value (i.e. has a negative NPV). Because the computation of NPV
follows a fairly rigid set of procedures, there is limited scope to frame risk either as a
positive or negative attribute. An exception involves the presentation of the break-even
probability for the NPV of a project when performing simulation analysis on this
computed value. For example, a project will likely seem much more desirable when
described as having an 80% percent chance of breaking even in terms of NPV rather
than as having a 20% chance of resulting in a negative NPV.
Probability
A related example involving simulation analysis is manipulating the lower cutoff levels
reported for the distribution of possible NPVs. For example, the reported 10% lower
cutoff for the NPV of a risky project will be less extreme than the 5% lower cutoff for the
NPV of this project. Consider the following example in which the computed NPV of the
project is $50,000 with a standard error of $35,000:
-$50,000
-$25,000
$0
$25,000
$50,000
$75,000
$100,000
$125,000
$150,000
NPV
The lower 5% cutoff for the NPV of this project is negative (-$7,570) whereas the lower
10% cutoff for its NPV is positive ($5,146). As a result, summarizing the total risk of this
project in terms of the 5% lower cutoff for its NPV could potentially make this project
appear more risky to decision-makers than if the 10% lower cutoff was instead reported.
3.2. Framing Risk in Absolute or Relative Terms
The risk of an investment might not seem so great if presented in percentage terms ,
but could seem overwhelming if presented in absolute terms. In many ways, relative
numbers can obscure the full scope of risk by removing a reference point, whereas
absolute numbers can be very difficult to interpret.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
One way that this framing effect could influence financial decisions is by representing
risk either in terms of percentage losses or dollar losses. For example, consider a
person deciding whether to invest in a $4 call option on a $50 stock. An investment
advisor could make the risk of the option appear smaller than investing in the stock itself
by focusing on the fact that this investor can lose only a maximum of $4 on the call
whereas he or she could potentially lose more than $4 on the stock. However if the
advisor notes that the maximum $4 loss on the option represents a 100% of the
person’s investment, whereas an investment in the stock would very likely not result in
100% loss, the person will likely view the stock as being less risky than the call option.
Another simple example of how framing risk in absolute or relative terms can be applied
to financial investments involves the opportunity to hedge risk using derivatives. For
example, consider the case where you have invested $10,000 in a risky bond that has a
90% chance of paying its promised 15% yield and a 10% chance of default resulting in
a 100% loss. You can invest in a bond swap that would reduce default risk by 50% but
reduce the promised yield by 40%. Expressed this way in terms of percentage risk and
return reduction, the bond swap appears to provide a favorable trade-off of lower return
for lower risk. However, suppose the bond swap is instead expressed in absolute risk
reduction: it would reduce default risk from 10% to 5% but reduce the promised yield
from 15% to 9%. Now the bond swap does not appear to provide such a favorable
trade-off of lower return for lower risk.
Firms that follow a rigorous capital budgeting procedure using NPV analysis have
virtually no flexibility to frame risk in absolute vs. relative terms. However, some firms
evaluate real investments using their Internal Rate of Return (IRR), the required rate of
return for which the computed NPV of the investment is zero, rather than using NPVs.
Because IRRs are expressed as a percentage return rather than an absolute amount, it
is possible that the use of IRR to compare completing projects may result in a differently
perceived risk/return trade-off for the two projects and therefore lead to a different
choice between them. As a simple example, consider two mutually-exclusive projects
that both require an initial investment of $1 million. The safer of the two projects
provides a 15% expected return in one year and has a 10% required rate of return
based on its risk. The riskier of the two projects provides a 20% return in one year and
has a 15% required rate of return based on its risk. Both projects have an IRR that
exceeds its required return by 5%. Thus, both projects appear to provide the same
level of return after adjusting for risk. However, the NPV of the safer project is
computed as
$1,000,000 1.15
NPV (safer ) 
 $1,000,000  $45,500,
1.10
which is higher than the computed NPV for the riskier project:
NPV (riskier ) 
$1,000,000 1.20
 $1,000,000  $43,500.
1.15
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Thus, the safer project appears better on a risk-adjusted basis in terms of NPV. Even
though the difference between the IRR and the required rate of return is 5% for both the
riskier and the safer project, the safer project delivers a higher NPV than the riskier one.
3.3. Number Size Framing
With number size framing, the main idea is that smaller numbers will seem more
significant when compared to one another then when large numbers are compared the
same way. An application that this can have to financial investment decision making is
whether risk is expressed using a measure that involves larger or smaller numbers. For
example, if the chance of default of a certain hypothetical bond increases from 5% to
6%, this can seem like a much more significant increase in risk then if this change is
expressed as a decrease from 95% to 94% in the probability of receiving the bond's
promised yield. This results from the fact that an increase from 5% to 6% signifies a
20% increase in the chance of a default, whereas the decrease from 95% to 94% only
signifies a 1.05% decrease in the chance of a full payout.
Another situation in which number size framing applies is the comparison of a riskier
and safer investments. For example, consider a person deciding between investing in a
bond that has a 2% chance of default and one that has an 8% chance of default.
Expressed in terms of the safer bond, the riskier bond has a 300% greater chance of
defaulting. However, expressed in terms of the riskier bond, the safer bond has only a
75% lower chance of defaulting. Thus, the choice of base default rate (the 2% default
rate for the safer bond vs. the 8% default rate for the riskier bond) can make the
difference in default rates appear either larger or smaller.
Number size framing effects could also have a significant impact on real investment
scenarios. When making capital budgeting decisions for a firm, the decision maker
must often compare several features of competing projects. For example, when
conducting a break-even NPV analysis on two capital budgeting projects during
simulation analysis, the two projects might seem to possess relatively similar risks 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.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
4. Implications
The above analysis demonstrates that framing effects present a number of opportunities
for those marketing financial products to consumers. Casual observation would show
that marketers are already aware of some of these framing biases and are already
adept at putting them to good use. In particular, attribute framing is often used when
presenting financial investment products to buyers. Marketers understand that they
must highlight the positive attributes of the products they are promoting in order to
convince clients to invest in these products.
In addition, marketers can express risk differences using small numbers, such as a 2%
vs. 5% default probability for two bonds, when they would like to steer clients towards
safer financial products and conversely expresses these risk difference using larger
numbers (a 98% vs. 95% probability of realizing the promised yield for these two bonds)
when they wish to promote riskier investments. Similarly, they can make certain
financial products appear relatively safer to clients and others relatively more risky by
choosing to the express the risk involved using either absolute or relative terms.
Because not every investment is prudent, consumers must be able to filter through
these marketing strategies to find out what is truly best for them. Smart consumers
must therefore be aware of these strategies and be able to counteract them, and debias
their decisions. According to Ackert & Deaves (2010) there are several steps that one
can take to successfully debias one’s decisions. Debiasing requires awareness of the
bias, the motivation to rid oneself of the bias, awareness of the direction and magnitude
of the bias, and the ability to do what is needed to stop the bias from having an effect on
investment decision.
Debiasing is a difficult process and it is best to exercise environmental control so as to
prevent the bias from ever taking root in the first place. Once the bias is existent in a
person, that person must have the insight and the motivation to change his behaviours
in order to debias his decisions. Financial education can also be improved by adapting
the materials to fit with money attitudes and personality types of the people who are
being educated. There exists a vast body of literature that shows that people can be
grouped into personality types. Two well-known examples of psychographic profiling
techniques are the Myers-Briggs and the planner-avoider continuum. Developing an
investor educational programs that are matched with each personality profile would help
investors understand the financial information more clearly and help them avoid biases.
For example, the Mayer’s 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. 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. Designing financial education programs to help avoid biases, based
on each individual person’s personality profile would better match the financial
educational material to the needs of the person. This would hopefully help people
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
better understand the financial information available, help them avoid biases, and help
them make more informed decisions (Ackert & Deaves, 2010).
5. Summary and Conclusions
This paper has shown ways in which attribute framing, framing risk in absolute vs.
relative terms, and number size framing can potentially impact financial and real
investment decisions. As a consequence, these three framing effects could be
deliberately used by financial institutions to more effectively market their products to
retail customers, and by vendors to more effectively market their products to business
decision makers looking to make capital budgeting decisions. With such an onslaught
of information being framed in a way that suits the needs of such sellers, as buyers of
these products it would be important to be able to debias one’s decisions. The most
effective way to debias one’s decisions is through awareness of the bias and the
understanding of how to overcome it. This can be achieved through financial education
that is more suited to each individual’s personality profile (Ackert & Deaves, 2010).
A limitation of the current study is the lack of any experiments to test whether the
framing effects discussed in this paper actually do influence individuals making financial
or real investment decisions and, if so, the magnitude of any observed framing effects
Potential mitigating or moderating factors, such as personality type or gender could also
be investigated. In addition, there are other types of framing mentioned in the literature
that potentially could be applied to financial and/or real investment decision-making.
Thus, there are several potentially fruitful avenues for future research.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
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