Choices, Values, and Frames
This concept discusses how cognitive and psychophysical factors shape decision-making in risky and riskless contexts, highlighting how framing and mental accounting can lead to preferences that violate rational choice theory.
THE IDEA
APPENDIX B: CHOICES, VALUES, AND FRAMES*
Daniel Kahneman and Amos Tversky
ABSTRACT: We discuss the cognitive and the psychophysical determinants of choice in risky and riskless contexts. The psychophysics of value induce risk aversion in the domain of gains and risk seeking in the domain of losses. The psychophysics of chance induce overweighting of sure things and of improbable events, relative to events of moderate probability. Decision problems can be described or framed in multiple ways that give rise to different preferences, contrary to the invariance criterion of rational choice. The process of mental accounting, in which people organize the outcomes of transactions, explains some anomalies of consumer behavior. In particular, the acceptability of an option can depend on whether a negative outcome is evaluated as a cost or as an uncompensated loss. The relation between decision values and experience values is discussed.
Making decisions is like speaking prose—people do it all the time, knowingly or unknowingly. It is hardly surprising, then, that the topic of decision making is shared by many disciplines, from mathematics and statistics, through economics and political science, to sociology and psychology. The study of decisions addresses both normative and descriptive questions. The normative analysis is concerned with the nature of rationality and the logic of decision making. The descriptive analysis, in contrast, is concerned with people’s beliefs and preferences as they are, not as they should be. The tension between normative and descriptive considerations characterizes much of the study of judgment and choice.
Analyses of decision making commonly distinguish risky and riskless choices. The paradigmatic example of decision under risk is the acceptability of a gamble that yields monetary outcomes with specified probabilities. A typical riskless decision concerns the acceptability of a transaction in which a good or a service is exchanged for money or labor. In the first part of this article we present an analysis of the cognitive and psychophysical factors that determine the value of risky prospects. In the second part we extend this analysis to transactions and trades.
When to use it
Marketing: A company frames a product discount as 'Save $10' vs. 'Get $10 off' to influence purchase decisions.
Public policy: When communicating health risks, framing in terms of survival rates rather than mortality rates can increase compliance.
Personal finance: An investor's decision to sell or hold stocks can be influenced by whether the market is framed as a gain or a loss from the purchase price.
FROM THEORY TO EVERYDAY LIFE
In practice
Medical Treatment Framing
A medical treatment described as having a 90% survival rate is more likely to be chosen than one described as having a 10% mortality rate, even though the risk is objectively the same. The framing of outcomes influences preferences.
Loss Aversion in Investing
An investor is more motivated to avoid a $100 loss than to gain $100, leading to risk-averse behavior in gain situations and risk-seeking behavior to avoid losses. This asymmetry is a key aspect of prospect theory.
A MOMENT TO REFLECT
Put it to work.
Think of a recent decision you made. How might the framing of the options have influenced your choice? What would have happened if the same situation was described differently?
Consider a risk-averse or risk-seeking behavior you observed. Could it be explained by the psychophysics of value where losses loom larger than gains?
How does mental accounting affect the way you evaluate a purchase that is a necessity versus a luxury? Give an example.
Often confused with
References
- On the Psychology of Prediction — D. Kahneman and A. Tversky (1973)
- Subjective Probability: A Judgment of Representativeness — D. Kahneman and A. Tversky (1972)
- Conservatism in Human Information Processing — W. Edwards (1968)
- Belief in the Law of Small Numbers — A. Tversky and D. Kahneman (1971)
- Availability: A Heuristic for Judging Frequency and Probability — A. Tversky and D. Kahneman (1973)
- Perceived Frequency of Concrete and Abstract Words — R. C. Galbraith and B. J. Underwood (1973)
- Genesis of Popular but Erroneous Psychodiagnostic Observations — L. J. Chapman and J. P. Chapman (1967)
- Illusory Correlation as an Obstacle to the Use of Valid Psychodiagnostic Signs — L. J. Chapman and J. P. Chapman (1969)
- Comparison of Bayesian and Regression Approaches to the Study of Information Processing in Judgment — P. Slovic and S. Lichtenstein (1971)
- On the Subjective Probability of Compound Events — M. Bar-Hillel (1973)
- A Confirmation of the Inertial-Ψ Effect in Sequential Choice and Decision — J. Cohen, E. I. Chesnick, and D. Haran (1972)
- Unpublished manuscript — M. Alpert and H. Raiffa
- Two Techniques for Assessment of Subjective Probability Distributions: An Experimental Study — C. A. Stael von Holstein (1971)
- The Assessment of Prior Distributions in Bayesian Analysis — R. L. Winkler (1967)
- The Foundations of Statistics — L. J. Savage (1954)
- Probability: Interpretations — B. de Finetti (1968)
CONTINUE THE CONVERSATION
Source texts
- Thinking, Fast and Slow (Daniel Kahneman)