Personal Finance Essentials
Framing Bias
The Psychology of Investing > Framing Bias
How we look at things has a dramatic impact on how we feel about them.
If you buy an $800 item for $500, will you say that you spent $500 – or that you saved $300? Both are true. That’s framing.
Would you rather buy an investment that has a 1 in 6 chance of success, or one that has an 83% chance of failure? You likely prefer one or the other – but they are identical; they’re merely framed differently.
Would you rather lose 1% on your portfolio, or put 1% into an investment that becomes worthless? You surely have a preference, even though the result on your wealth is identical.
Beware of framing, because it could cause you to do something that, if framed another way, you wouldn’t do. Always ask yourself whether you’d feel the same way about a decision if it were described differently.