How would you react if you were told that an investment has a 90% probability of success, versus a 10% likelihood of failure?
Although the odds are the same, your response might differ based on how the information is presented. This phenomenon is known as framing bias, a cognitive inclination that influences our interpretation of information based on its portrayal.
At the heart of framing bias lies human psychology. We’re influenced by the way information is presented – a positive frame often inspires a positive reaction, and vice versa.
In investing, framing bias can significantly impact decision-making. Investors may perceive identical situations differently based purely on how information is framed.
Consider an investor choosing between two similar Aussie super funds. One fund advertises a ‘98% chance of positive returns’, while the other acknowledges a ‘2% chance of losses’. Although the reality is the same, the investor, influenced by framing bias, may favour the first option due to its positive framing.
So how can investors combat framing bias? Consider reframing the information. If something is presented in a positive light, try considering it from a negative angle, and vice versa. This can help balance your perspective and lead to a more rational decision.
Financial advisers can also help provide an objective viewpoint, untarnished by the framing effect, and guide you towards making decisions based on facts, rather than presentation.
By acknowledging and managing framing bias, Aussie investors can strip away the veneer of presentation, making decisions based on substance rather than spin.
