Framing Bias: Understanding How Presentation Influences Decisions

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 financeBehavioral FinanceBehavioral finance is the study of the influence of psychology on the behavior of investors or financial practitioners. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, 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.”

vs.

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.

Learn more in CFI’s Behavioral Finance Course, where you can read about a closely-related bias error, the narrative fallacy.

Guarding Against Framing Bias

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 reportEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in.  The Equity Research Division is a group of analysts and associates. This equity research overview guide 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.

Additional Resources

Thank you for reading this CFI guide to understanding how framing bias plays a role in investor behavior. Check out CFI’s Behavioral Finance Course to learn much more!

Additional helpful resources include:

• Behavioral Interview QuestionsBehavioral Interview QuestionsBehavioral interview questions and answers. This list includes the most common interview questions and answers for finance jobs and behavioral soft skills. Behavioral interview questions are very common for finance jobs, and yet applicants are often under-prepared for them.
• What is Financial ModelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model.
• Loss Aversion BiasLoss AversionLoss aversion is a tendency in behavioral finance where investors are so fearful of losses that they focus on trying to avoid a loss more so than on making gains. The more one experiences losses, the more likely they are to become prone to loss aversion.
• Overconfidence BiasOverconfidence BiasOverconfidence bias is a false and misleading assessment of our skills, intellect, or talent. In short, it's an egotistical belief that we're better than we actually are. It can be a dangerous bias and is very prolific in behavioral finance and capital markets.