Framing bias occurs when people make a decision based on the way the information is presented, as opposed to just on the facts themselves. The same facts presented in two different ways can lead to people making different judgments or decisions. In behavioral finance, investors may react to a particular opportunity differently, depending on how it is presented to them. Learn more in CFI’s Behavioral Finance Course!
Framing Bias in Finance
The phrasing, or how an investment is “framed”, can cause us, as investors, to change our conclusions about whether the investment is good or bad.
What’s fascinating is that when investors are not sure of all the facts, or in a situation where there are many unknowable factors, there is, in fact, a high probability of reflexive decision making. The probability of being influenced by framing bias is, thus, also increased.
Below are some examples of framing in finance:
Option 1: “In Q3, our Earnings per Share (EPS) were $1.25, compared to expectations 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 the earnings report. The way it is presented – as an improvement over the previous quarter – puts a more positive spin on the EPS number.
How can you 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, if any, that has on your conclusion. The key thing is trying to kick in the logical, reflective approach to decision making and avoid impulsive, reflexive decisions.
For example, an equity research report may come with a lot of opinion and bias included in the research. Try to remove any editorial/judgmental comments and look at only the key numbers and underlying assumptions driving the valuation. Then arrive at your own conclusions, rather than being swayed by how the information is presented to you.
Thank you for reading CFI’s guide on Framing Bias. Additional helpful resources include: