It's all about the context: How framing impacts our investment choices
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Last week I received a text from my best friend’s seven-year-old son, asking if I would contribute to the read-a-thon fundraiser for his school. Considering my love for my friend, her son, and reading, I was more than happy to contribute to a worthy cause. As I clicked on the link he supplied, I was directed to a homepage for the read-a-thon, and I couldn’t help but be struck by the ease today’s technology affords to fundraisers. There was a lovely picture of my friend’s young son and a hard-to-resist emotional plea from the adorable philanthropist himself. While it would be hard enough to argue against the idea that these two elements make it easier to raise funds in the digital world, it was the next part that really fascinated

me. The page suggested donation amounts ranged from $25-$250 dollars, and automatically populated the $50.00 amount into the donation field. Whew! Gone are the days of buying magazines and wrapping paper from a 3rd grader! Once I chose my donation amount, the child’s fundraising goal also increased. This was fascinating to me because it is a great example of a cognitive bias known as framing.


What is framing bias?

Framing bias, introduced through the research of Amos Tversky and Daniel Kahneman, is the tendency to respond to situations differently based on the context in which a choice is presented, or framed. Often the focus is too narrow, may only reveal one or two aspects of a situation, and/or exclude other considerations. (1) The anecdote about my friend’s son above illustrates the concept of framing nicely because the fundraiser presents a limited range of options to the person donating money. It first suggests through populating $50 in the donation field that this is the first choice to consider. Further, by offering other amounts ($25, $75, $100, $250), the page inherently implies that these are the ONLY options for amount donation, when in fact one could simply enter $5.00 in the donation field (or whatever amount they wanted). A third component, the increase in the fundraising goal, creates a carrot and stick approach, in which the desire to help the fundraiser meet their goal is always present. If the fundraiser were to meet their goal, future donators may be less inclined to donate, thereby stunting the capacity for continued contributions.

Framing bias can have an impact on the choices that we make because it only offers possibilities, or outcomes, based on very specific information. Mindset can be impacted when things are presented through a narrow lens or conclusions are based on limited knowledge. Equivalent information can be either more or less attractive depending on what features are highlighted. Further, when framing is present, people tend to focus more on how information is conveyed rather than the actual data itself. (2)


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In finance, framing bias serves as a mental structure that individuals create when formulating a shortcut or simplifying a decision. (3) It can poorly impact investor’s rationale, their relationship with their money, and investing in general. Framing can influence an investor’s willingness to accept risk dependent on how a question or scenario is presented. This often dovetails heavily with the concepts of prospect theory and loss aversion. According to prospect theory, a loss is more significant than an equivalent gain, and a certain gain is considered preferable to a likely gain. Meanwhile, a likely loss is preferred over a certain loss. Loss aversion was coined specifically in response to prospect theory’s observation that emotionally, investors tend to feel the pain of losses more than the pleasure of gains.

(Pompian, 191)




You have the choice of investing in one of two portfolios.

1. Portfolio A is offering a 70% probability that you will reach your financial goals.

2. Portfolio B gives a 30% chance that you will not achieve your goals.


Which portfolio would you select?

Both portfolios are identical in terms of the amount invested, funds offered, and allocation amounts. Does the positive framing of portfolio A vs. the negative framing of portfolio B change your response?

If it does, it may indicate that you tend to allow emotions dictate your decision-making process and may make you choose based on a greater willingness to avoid losses than achieving gains in your portfolio.



Framing bias is controlled partly by the formulation of the problem and partly by the norms, habits, and personal characteristics of the decision maker. As you can see by the example above, the options offered leave out quite a few details that would be relevant to making an educated decision. Human beings, by nature, are inclined to make the choice that will offer a shortcut in arrival at a conclusion and will rely heavily on their emotions to aid them in making choices.

How a goals-based framework addresses framing bias

David Blanchett, CFP®, CFA, managing director and head of retirement research at PGIM, published a study in 2015 suggesting that using a goals-based framework to determine which goals to fund and how to fund them can lead to an increase in utility-adjusted wealth of 15.09 percent for a hypothetical household versus a naïve strategy focused only on funding retirement. (4)

The power of goals-based financial planning rests in the ability of an advisor to uncover the underlying motivation for the investor. Because inherent human heuristics and choices investors make are based on limited frameworks, it is not uncommon to see a misalignment between peoples’ goals and the financial choices they make. A goals-based planner that is skilled at identifying cognitive biases, such as framing, can properly align the desires of an investor with a portfolio that will be better suited to meet their objectives.

It can be argued that framing, when leveraged for good, can be beneficial to investors and their advisors. Remember that the definition of framing is the tendency to respond to situations differently based on the context in which a choice is presented or framed. Largely speaking, a narrow perspective often leads to poor investment choices because the investor fails to see the big picture. This can happen all-too-often when clients experience the discomfort of short-term market fluctuations.

However, there are instances where employing specific frameworks can be helpful. As an example, inflation rates are the highest they have been in four decades, but how one experiences inflation can vary greatly depending on lifestyle and individual spending habits. No two investors will likely experience inflation in the same way. Some sectors most impacted in the last year are energy and transportation costs, wood product manufacturing, accommodations, and metal manufacturing. For consumers, this can translate to escalating costs for things such as travel, furniture, and buying a new car.

Advisors that take a client’s “personal” inflation into account may increase or decrease inflationary considerations in the client’s plan itself depending on how the client spends their money. For example, cost increases are currently higher at the grocery store than in restaurants.(5) An advisor may want to take into account whether their client eats at home more often than one that eats out. By addressing the specific needs of this client in a narrow context, the advisor can get to the heart of this client’s needs and eliminate the distractions, or broader contexts that cause a client worry and subsequently choices that may not serve them.

Source: U.S. Bureau of Labor Statistics


Works Cited

1– Behavioral Finance and Wealth Management: How to Build Investment Strategies that Account for Investor Biases, 2nd Edition, Michael M Pompian, 2012, p 143-153, 191

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