What is Framing Bias?
Framing bias occurs when people make a decision based on the way the information is presented, as opposed to just on the facts themselves. To rephrase this point, the same facts presented in two different ways could lead to different outcomes or decisions from people. In behavioral finance, investors may react to a particular choice in different ways depending on how it is presented, e.g., as a loss or as a gain. People tend to avoid risk when a positive frame is presented but seek risks when a negative frame is presented. Learn more in CFI’s Behavioral Finance Course!
Framing Bias in Finance
So, we’ve seen in the financial markets is that we can change the phrasing or how a problem is framed, and it can cause us, as investors, to change our conclusions.
What’s fascinating is that when investors are not sure of all the facts or in the presence of many unknowable factors, there is, in fact, a high possibility of reflexive decision making and therefore an increased possibility of being influenced by framing.
Below are some examples of framing in finance:
Option 1: “In Q3, our Earnings per Share (EPS) were $1.25, compared to our guidance of $1.27.”
Option 2: “In Q3, our Earnings per Share (EPS) were $1.25, compared to Q2 where they were $1.21.”
Clearly, option 2 does a better job of framing than option 1.
Learn more in CFI’s Behavioral Finance Course!
Guarding Against Framing Bias
How do we guard against framing bias? One of the things you can do, as an investor, is to always challenge the framing. Consider rephrasing the information you’re reading and see what impact that has on your conclusion. The key thing is trying to kick in that logical, reflective approach to decision making.
For example, an equity research report may come with a lot of opinion and bias included in the research. Try to remove all comments and look at only key numbers and assumptions that drive the valuation.
Thank you for reading this guide to understanding how framing bias plays a role in investor behavior. To learn more, check out CFI’s Behavioral Finance Course!
Additional helpful resources include: