Behavioral Research In Accounting

Volume 14, 2002

Printed in USA

An Empirical Examination of
Competing Theories to Explain
the Framing Effect in
Accounting-Related Decisions
C. Janie Chang
San Jose State University

Sin-Hui Yen
Tamkang University

Rong-Ruey Duh
National Taiwan University

)*564)+6
The purposes of this study are to explore framing effects in a mana-
gerial accounting decision context and to test the explanatory power
of prospect theory and two competing theories, fuzzy-trace theory and
probabilistic mental models, on such effects. In Experiment 1, 86 un-
dergraduate students made a choice between two alternatives in a
managerial decision problem that illustrates a classic, Asian disease-
type business scenario. Results show that the subjects committed
the framing effect bias and that prospect theory, fuzzy-trace theory,
and probabilistic mental models all predict the bias. In Experiment 2,
a business variant of the Asian disease problem was designed to dis-
tinguish among the explanatory abilities of these theories in an ac-
counting context. One hundred eighty-five undergraduate students par-
ticipated in the experiment. Results of Experiment 2 indicate that the
fuzzy-trace theory provides additional power to explain the framing
effect. Hence, accounting professionals can design better approaches
to reporting/presenting financial information that will help managers
alleviate the framing effect in decision making.

INTRODUCTION
Most accounting tasks require that accountants make judgments
in collecting and providing information for managers to use in decision

We express our thanks to the editor, Susan Haka, and two anonymous reviewers for
their comments on earlier versions of this paper. Data from this study may be obtained
from the first author upon request.
36 Chang, Yen, and Duh

making. It is possible that managers judge or justify their decisions

based on the manner in which accounting information is provided,
while not paying adequate attention to the content of that informa-
tion. Managerial decisions that result from such biases can have ad-
verse consequences for corporations and their stakeholders (Ashton
and Ashton 1995). Thus, identifying the impact of the manner in which
decision-related information is provided by accountants to decision
makers is a critical step in understanding how accounting informa-
tion should be collected and provided to maximize firm value.
Decision-making literature has shown that individuals respond
differently to the same decision problem if the problem is presented
in a different format (for reviews, see Kühberger 1998; Levin et al.
1998). This phenomenon is referred to as a framing effect (Kahneman
and Tversky 1979; Tversky and Kahneman 1981). Tversky and
Kahneman used prospect theory to explain framing effects. This theory
supports the findings of many prior accounting studies in framing.
However, inconsistent results documented in some recent psychol-
ogy literature (see Schneider [1992] for a review) have inspired be-
havioral researchers to address the limitations of using prospect
theory to explain framing effects. For example, Levin et al. (1998)
demonstrated three types of framing effects: standard risky choice,
attribute framing, and goal framing.1 Each type of framing effect rep-
resents divergent mechanisms and consequences in decision mak-
ing. Levin et al. (1998) indicated that prospect theory probably best
explains the risky choice framing effect, but not the other two types
of framing effects. Even so, Levin et al. (1998) cast doubt on the
ability of one single theory (i.e., prospect theory) to interpret the em-
pirical evidence of risky choices in different contexts. As Wang and
Johnston (1995) indicated, framing effects on individual behavior
are a context-dependent choice phenomenon—not a general, cross-
domain phenomenon. Converging evidence demonstrates that a fram-
ing effect depends on task, content, and context variables inherent
in the choice problem (Fagley and Miller 1997; Wang 1996).

1 The framing effect associated with the classic Asian disease problem (Tversky and
Kahneman 1981) is a typical example of a standard risky-choice framing effect. In
managerial accounting literature, most framing studies fall into this category. In
attribute framing, a single attribute of an event (e.g., the evaluation of a client’s
internal control system) is framed either positively (e.g., the strength of internal
controls) or negatively (e.g., the risk of internal controls). The framing effect is as-
sessed by comparing the judgments of the likelihood of framed events’ occurrence.
In most auditing framing research, auditors are asked to indicate the likelihood of
an event, such as the reliability of a client’s internal controls. In this scenario,
auditors often commit an attribute-framing bias. A goal-framing effect impacts the
persuasiveness of a communication. Very few accounting studies in framing be-
long to this type.
An Empirical Examination of Framing Effects 37

Alternative theories for analyzing framing effects were developed

in the early 1990s (Frisch 1993; Reyna and Brainerd 1991a, 1991b;
Schneider 1992; van Schie and van der Pligt 1995). In particular, proba-
bilistic mental models (PMM) and fuzzy-trace theory (FTT) have been
used to test framing effects in making standard risky choices
(Kühberger 1995; Reyna and Brainerd 1991a, 1991b; Reyna and Ellis
1994). Since these theories have been investigated only in
nonaccounting settings, whether these theories maintain descriptive
validity in accounting contexts remains unknown (Fagley and Miller
1997; Schneider 1992; Wang 1996; Wang and Johnston 1995).
Previous accounting research has adopted, explicitly or implicitly,
prospect theory to address the framing effect phenomenon in auditing
(Emby 1994; Emby and Finley 1997; O’Clock and Devine 1995), tax
(Elffers and Hessing 1997; Martinez-Vazquez et al. 1992; Newberry et
al. 1993; Schadewald 1989; Schepanski and Kelsey 1990; Schepanski
and Shearer 1995; Yaniv 2000) and managerial accounting contexts
(Barton et al. 1989; Chow et al. 1997; Rutledge and Harrell 1993,
1994; Sharp and Salter 1997). Almost all auditing studies have exam-
ined the attribute framing effect, and most managerial accounting and
tax research have investigated framing effects focusing on risky choices.
Although most studies have confirmed prospect theory, the results of
Jackson and Spicer (1986) and Martinez-Vazquez et al. (1992) did not
support the proposition of prospect theory for income tax compliance.
Moreover, Barton et al. (1989), using employees with managerial expe-
rience, found atypical framing effects that were opposite to the predic-
tion of prospect theory. Boritz (1997) questioned the appropriateness of
using prospect theory to explain the framing effect in auditing contexts.
In tax studies, both Sanders and Wyndelts (1989) and Schadewald
(1989) found no framing effect, but observed a reflection effect2 in
making tax decisions. Most prior research has not distinguished fram-
ing effects from reflection effects. Arkes (1991), Kühberger (1995), and
Levin et al. (1998) argued that these two effects are different—the fram-
ing effect concerns presenting the same decision problem with different
frames, while the reflection effect involves two different decision prob-
lems. Failure to distinguish between these two effects may lead to mis-
interpretation of some studies’ results or may make it difficult to explain
results with mixed signals. Moreover, because the framing effect is a
bias while the reflection effect is not, accounting professionals should
be alert to possible framing effects and design a reporting system to
prevent such effects; they can be less vigilant about reflection effects.
However, decision makers should be reminded by some means that

2 More detailed discussions of how to distinguish between framing and reflection ef-
fects are provided later in this paper.
38 Chang, Yen, and Duh

reflection effects are related to two decision problems and that they
need to consider factors in each situation separately.
In this paper, we compare the abilities of three theories (prospect
theory, probabilistic mental models, and fuzzy-trace theory) to explain
a possible framing effect in capital budgeting decision contexts. As
Arnold (1997, 62) has pointed out:
From a managerial accounting perspective, managers may re-
view accounting information and make decisions that impact the
future direction of the company. The initial interpretation of the
information can determine the additional information that is con-
sidered when making choices regarding the future….The impli-
cations of framing to accounting environment is potentially quite
significant.
In addition, systematic research is sparse on how managers use ac-
counting information to ensure consistent business decisions (Bruns
and McKinnon 1993, 85).3 Further, different theories represent differ-
ent cognitive processes. An understanding of which theory can best
describe decision-making processes in accounting contexts would have
implications for accountants in designing a better format for present-
ing information to decision makers. For example, if prospect theory
dominates, then one may consider providing multiple reference points
in accounting reports or transforming a problem into a standard rep-
resentation to prevent managers being affected by a framing effect
(Arkes 1991; Hammond et al. 1998; Jamal et al. 1995). However, if
probabilistic mental models dominate, other measures, such as pro-
viding complete information rather than incremental information, may
be effective in assisting managers to make better decisions. If the fuzzy-
trace theory can best describe the risky-choice framing effect in an
accounting context, numerical information should be presented care-
fully so that decision makers cannot summarize it easily into vague
wordings. Finally, the distinction between framing effects and reflec-
tion effects needs to be addressed so that accountants can focus on
appropriate approaches for alleviating framing effects, not reflection
effects, when designing accounting reports or information systems.
This clarification may also shed light on previous mixed results, which
may assist future accounting, auditing, and tax researchers in de-
signing experiments to investigate framing effects.

3 The impact of incentives on performance has also been considered an important

factor in decision making (Libby 1995; Libby and Luft 1993). However, Arkes (1991,
495) suggested that framing effect is a “psychophysically based error.” Incentives
are effective in debiasing “strategy-based errors,” and ineffective in debiasing psy-
chophysically based errors. In addition, Emby and Finley (1997) suggested that fram-
ing effects seem to be data-related rather than effort-related and that the impact of
incentives on a data-related bias may be limited (Kennedy 1993, 1995). For this
reason, we decided to limit the scope of this study and not to include this factor in
the research design.
An Empirical Examination of Framing Effects 39

Two hundred seventy-one undergraduate business students par-

ticipated in this study. Results suggest that the fuzzy-trace theory
better explains potential framing effects on managerial decision mak-
ing than does the often-applied prospect theory. Since the current
study is exploratory, further investigations are warranted.
The remainder of this paper is organized as follows. The next sec-
tion briefly illustrates the framing effect and explains prospect theory.
Two competing theories are introduced in the following section, which
leads to our research hypotheses. The fourth and fifth sections present
the research method and the empirical results of Experiments 1 and
2. Finally, discussions of the findings, implications and limitations of
the study, and future research directions are highlighted in the last
section.

PROSPECT THEORY AND FRAMING EFFECTS

Framing Effect and the Classic Asian Disease Problem
The most well known example of a framing effect involves the clas-
sic “Asian disease problem” (Tversky and Kahneman 1981, 453):
Problem 1:
Imagine that the U.S. is preparing for the outbreak of an unusual
Asian disease, which is expected to kill 600 people. Two alterna-
tive programs to combat the disease have been proposed. Assume
that the exact scientific estimates of the consequences of the pro-
grams are as follows:
If Program A is adopted, 200 people will be saved.
If Program B is adopted, there is 1/3 probability that 600 people
will be saved and 2/3 probability that no people will be saved.
Which of the two programs would you favor?
Problem 2:
Imagine that the U.S. is preparing for the outbreak of an unusual
Asian disease, which is expected to kill 600 people. Two alterna-
tive programs to combat the disease have been proposed. Assume
that the exact scientific estimates of the consequences of the pro-
grams are as follows:
If Program C is adopted, 400 people will die.
If Program D is adopted, there is 1/3 probability that nobody will
die and 2/3 probability that 600 people will die.
Which of the two programs would you favor?

For Problem 1 (using the positive wording “will be saved”), Tversky

and Kahneman (1981) reported that a clear majority of subjects (72
percent) preferred saving 200 lives for sure. That is, in the domain of
40 Chang, Yen, and Duh

gains (will be saved), their subjects preferred the risk-averse Program

A to the risky Program B that offers a 1/3 chance of saving 600 lives
(28 percent). According to the expected utility theory (Friedman and
Savage 1948), Programs C and D in problem 2 (using the negative
wording “will die”) are identical to Programs A and B in problem 1.
However, most subjects preferred Program D (78 percent) to Program
C (22 percent). That is, framing the identical problem in different ways
can result in preference reversals. Tversky and Kahneman (1979) used
prospect theory as a framework to explain this phenomenon.

Prospect Theory
According to prospect theory, during a decision maker’s prelimi-
nary analysis of prospects, a psychological editing process (Phase I)
takes place in order to organize the prospects, reformulate options,
and simplify the subsequent evaluation and choice (Phase II). During
the editing phase, a perceived reference point is established to distin-
guish gain from loss outcomes. The coding element of the editing pro-
cess can be represented by a hypothetical value function. An S-shaped
curve that passes through a central reference point can be used to
describe prospect theory. This value function is predicted to be con-
cave for gains and convex for losses, but it is also steeper for losses
than for gains (Kahneman and Tversky 1979). The above conditions
lead individuals to favor risk aversion for gains and risk seeking for
losses.
As mentioned earlier, outcomes are coded relative to a decision
maker’s reference point. The reference point an individual adopts de-
pends on how the problem is framed. For example, the positive prob-
lem frame “will be saved” of Programs A and B in the classic Asian
disease Problem 1 would lead to an adjusted reference point that “the
disease will kill 600 people.” In this case, a decision maker perceives
the outcomes of Programs A and B as gains (i.e., to save lives) and,
having a tendency to be risk averse, would choose Program A (i.e.,
200 people will be saved) because of the concavity of the S-shaped
value function. In Problem 2, using the negative problem frame “will
die,” the reference point is not adjusted (i.e., nobody died so far), so
the decision maker perceives the outcomes of both Programs C and D
as losses. If the decision maker is more risk seeking, due to the con-
vexity of the S-shaped value function, he/she is predicted to choose
Program D, because this alternative offers a one-third chance that
nobody will die.

The Distinction between the Framing Effect and the Reflection

Effect
Tversky and Kahneman (1981) suggested that pronounced prefer-
ence reversals in risk result from the ways the choice/option out-
comes are framed. Although this phenomenon is called a framing effect,
An Empirical Examination of Framing Effects 41

a reflection effect from prospect theory has been applied to explain it.
Since Kahneman and Tversky (1979) did not differentiate reflection
effects from framing effects, subsequent studies have used these two
terms interchangeably (e.g., O’Clock and Devine 1995; Schadewald
1989), which may be the key reason for mixed results in research on
framing effects (Fagley 1993; Kühberger 1995). This section describes
both effects and distinguishes one from the other.
In accordance with prospect theory, the S-shaped value function
is more relevant to problem domains (gain vs. loss) than to problem
frames (positive vs. negative). The following two lottery experiments
(Kahneman and Tversky 1979) demonstrate the impact of problem
domains.4
Problem 3a: Choose between (n = 95) (problem domain: gain)
A: Win $4,000 with probability .80, and $0 with
probability .20 [20%]
B: Win $3,000 [80%]
Problem 3b: Choose between (n = 95) (problem domain: loss)
A: Lose $4,000 with probability .80, and $0 with
probability .20 [92%]
B: Lose $3,000 [8%]
Kahneman and Tversky (1979) labeled the occurrence of reflection from
risk-averse choices for a gain domain (Problem 3a) to risk-seeking
choices for a loss domain (Problem 3b) as a reflection effect. For a
reflection effect to occur, two gambles must be considered in which
one is generated from the other by replacing gains with losses, and
vice versa. That is, a reflection effect does not involve the same gamble
(Arkes 1991). The expected value of the problem in the gain domain is
positive, and that of the problem in the loss domain is negative. What
appears to be a framing bias may in fact be a reflection effect if the
decision makers exhibit preference reversals in making choices for
different problems.
Compared with reflection effects, framing effects involve only one
problem (e.g., Asian disease problem) with two frames (positive and
negative). For example, the actual problem domain of the Asian dis-
ease problem is “loss.” It is the problem frames that illusively make a
loss domain alternative appear to be in the gain domain under the
positive frame condition via the shift of reference point. As Li (1998)
indicated, the term “framing effect” refers to changes in responses
from different descriptions of the same problem, whereas “reflection
effect” refers to different responses because there are two problems.
Table 1 analyzes the framing effect in the Asian disease problem.

4 The total number of respondents is denoted by n, and the percentage who chose
each option is indicated in the brackets.
 42

TABLE 1
Analysis of the Framing Effect in the Asian Disease Problem

The problem: Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to
kill 600 people. Two alternative programs to combat the disease have been proposed.

Problem Domain Actual Problem

Programs Problem Framea Perceivedb Domainc
A: 200 will be saved Positive Gain Loss
B: 1/3 chance that 600 will be saved
and 2/3 chance that 0 will be saved Mixed Gain Loss
C: 400 will die Negative Loss Loss
D: 1/3 chance that 0 will die and 2/3
chance that 600 will die Mixed Loss Loss
Revised A:d 400 people will not be saved. Negative Gain Loss
Revised C:d 200 people will not die. Positive Loss Loss

a The problem frame (positive or negative) is decided by the outcome of the option and by the use of a negation “not.” That is, the
problem frame of “200 (or 600) will be saved” or “0 will die” is positive, and the problem frame of “400 (or 600) will die” or “0 will be
saved” is negative. When using the negation “not,” the problem frames of “200 will not die” and “400 will not be saved” are positive
and negative, respectively.
b According to Kühberger (1995), the problem domain decision makers perceive (gain or loss) depends only upon the wording with
regard to the option outcome (e.g., “save” or “die”). When using the wording “saved” to describe the option outcome, decision makers
will perceive the problem domain as “gain.” When using the wording “die” to describe the option outcome, decision makers will
perceive the problem domain as “loss.”
c No matter how the problem is framed, the domain for the Asian disease problem should be considered a loss, since the outbreak is
expected to kill 600 people.
d The revised version of Program A (Program C) uses the negation “not” to change the problem frame from positive (negative) to
negative (positive).
Chang, Yen, and Duh
An Empirical Examination of Framing Effects 43

Since reflection and framing effects are both predicted in prospect

theory by the S-shape of the value function, most studies view these
two terms similarly. However, these two effects are distinctly differ-
ent. To be exact, a framing effect is the impact of how information is
presented to describe a specific problem, given the actual problem
domain is unchanged. Hence, framing effects manifest as a decision
bias (e.g., Emby and Finley 1997; Rutledge 1995), but a reflection
effect requires different domains, irrespective of problem frames. For
example, regardless of how the game is framed, the above Problems
3a and 3b are distinctly different, with a gain domain and a loss do-
main, respectively.
Since a framing effect is a perceptual phenomenon similar to an
optical illusion, whereas a reflection effect is not (Fagley 1993), dis-
cerning the differences between these two effects is critical. When pro-
viding financial information, accounting professionals should be alert
to the format of the presentation to avoid causing possible framing
effects. Although a reflection effect does not involve a decision bias,
accounting professionals should prepare remarks that will remind the
decision makers to view the alternatives as two distinctly separate
problems and to consider the different factors for each alternative.
In addition, as Arkes (1991) and Kühberger (1995) argued, framing
and reflection effects have to be distinguished from each other so that
we can properly interpret the results of research on framing effects.
However, most of framing research in accounting thus far has not dis-
tinguished framing effects from reflection effects. For example, in
Schadewald’s (1989) study, subjects were not influenced by the fram-
ing effect when the same taxation problem was used with different wording
to frame the options, but they did exhibit reflection effects using two
pair of different decision problems. Schadewald (1989) did not separate
the two effects, which made it difficult to explain the mixed results.
Likewise, the results of Sanders and Wyndelts (1989) partially sup-
ported the reflection effect but did not support the framing effect.

Research Hypothesis Based on Prospect Theory

According to Kühberger (1995), the wording with regard to the
option outcome (e.g., “save” or “die”) decides the problem domain (i.e.,
“gain” or “loss”) and relates to the reflection effect. On the other hand,
the problem frame (i.e., “positive” or “negative”) depends on the use of
a negation “not,” which relates to the framing effect. That is, adding
the negation “not” to the sentence only changes the problem frame
from positive to negative, or vice versa, but it does not change the
problem domain (i.e., the gain or loss domain still holds). Using the
Asian disease problem as an example, the possible combinations of
problem domains and problem frames concerning the certain option
with the negation “not” are illustrated in Table 1 as revised Programs
A and C.
44 Chang, Yen, and Duh

In the classic Asian disease problem, it should be noted that the

combinations of the problem domain that decision makers perceive
with the problem frame are gain domain/positive frame and loss do-
main/negative frame for Programs A and C, respectively. Therefore,
the classic Asian disease test is ambiguous, because it confounds fram-
ing effects and reflection effects. In order to separate the two effects, it
is necessary to create another set of combinations (i.e., gain domain/
negative frame and loss domain/positive frame). By comparing the re-
sults of the two different combination sets, we will understand more
clearly the effects of framing and reflection.
According to prospect theory, decision makers will choose the cer-
tain (risky) option over the risky (certain) option when the problem is
perceived as a gain (loss) domain, regardless of the problem frame (posi-
tive or negative). Accordingly, the hypotheses based on prospect theory
are generated as follows:

H1a: According to prospect theory, when the information of

a decision problem is stated in a gain domain/positive
frame, decision makers will choose the certain option
(no risk) over the risky option. When the information of
a decision problem is stated in a loss domain/negative
frame, decision makers will choose the risky option over
the certain option.

H1b: According to prospect theory, when the information of

a decision problem is stated in a gain domain/negative
frame, decision makers will choose the certain option
(no risk) over the risky option. When the information of
a decision problem is stated in a loss domain/positive
frame, decision makers will choose the risky option over
the certain option.

COMPETING THEORIES
In this section, we discuss two competing theories to explain fram-
ing effects: probabilistic mental models (Gigerenzer et al. 1991) and
fuzzy-trace theory (Reyna and Brainerd 1991a, 1991b). Our discussions
of these two theories will lead us to develop the research hypotheses.

Probabilistic Mental Models

Gigerenzer et al. (1991) developed probabilistic mental models (PMM)
theory to explain and predict individuals’ behaviors related to overcon-
fidence in judgments and decisions. Kühberger (1995) suggested that
PMM can also be used to explain the framing effect. According to PMM,
individuals presented with a two-alternative task first attempt to con-
struct a local mental model (LMM) of the task, then use it to solve the
An Empirical Examination of Framing Effects 45

problem using long-term memory and elementary logical operations.

In general, a LMM can be successfully constructed if (1) precise fig-
ures can be retrieved from long-term memory to compare alternatives,
(2) ranges/features of the information regarding the alternatives do
not overlap, or (3) elementary logical operations, such as exclusion,
can compensate for missing knowledge. If the problem cannot be solved
directly using a LMM, then a PMM is constructed using probabilistic
information generated from long-term memory. Most accounting and
management decisions would require the use of a PMM, since the sec-
ond and third requirements for the use of a LMM usually are not met
in solving business problems. The PMM theory suggests that a deci-
sion maker solves a problem by applying inductive inference, i.e., by
putting the specific decision task into a larger context (Gigerenzer et
al. 1991, 507).
According to the theory of PMM, a reference class of the decision
problem and a network of decision variables, in addition to the target
variable, are used to perform an indirect, frequency-based inference.
In other words, to make a decision, an individual first constructs a
reference class for the specific problem. Recall the four programs in
the Asian disease problem. For this particular problem, the reference
class could be “programs for fighting disasters” (Kühberger 1995).
Besides the target variable (i.e., to save lives), important variables in
the problem may include time, newly developed knowledge, skills and/
or medicines, additional resources, etc. Since Program A indicates that
200 people will be saved but does not specify the possible outcome for
the remaining 400 people, Program A leaves room for individuals to
build their own PMM.
After the subjects have read the problem and compared Programs
A and B regarding how many lives will be saved, they may conclude
that, as time progresses, new cures for the disease could be identified
and additional resources could be allocated to deal with the disaster.
Therefore, after an initial number of people have been saved, some
additional people may be saved as well. That is, under the wording
“will be saved,” Programs A and B may be stated as follows:
Program A: 200 people will be saved and some more may be saved
later.
Program B: There is 1/3 probability that 600 people will be saved
and 2/3 probability that no people will be saved.

The problem frame of Program A is positive, while that of Program B is

mixed, which may be the reason why subjects under this wording
situation prefer Program A to Program B. Program A allows for a pos-
sibility that additional people may be saved. On the other hand, when
the subjects compare Programs C and D (under “will die” wording),
they perceive the fact that under Program C 400 people will die for
46 Chang, Yen, and Duh

sure. In addition, the probability could be low that new knowledge will
be acquired to save people as time progresses. Therefore, additional
people may die after a relatively large portion of people die. Therefore,
Programs C and D may be stated as follows:
Program C: 400 people will die and some more may die later.
Program D: There is 1/3 probability that nobody will die and 2/3
probability that 600 people will die.

This could explain why subjects prefer Program D (mixed problem

frame) to Program C (negative problem frame). Thus, due to the ex-
perimental design (gain domain/positive frame for Program A, and
loss domain/negative frame for Program C) of the classic Asian dis-
ease problem, either the reflection effect or PMM effect could account
for the framing effect. However, it should be noted that a necessary
condition of PMM in explaining the framing effect is that the certain
option is described with incomplete information, which leaves room
for decision makers to consider other possible variables relevant to
the problem. In addition, the certain option is described using differ-
ent problem frames (positive or negative), which may lead decision
makers to opposite views of the same problem. Opposite to prospect
theory, the theory of PMM focuses on the problem frame, and the prob-
lem domain (gain or loss) is irrelevant. Therefore, in order to test the
descriptive abilities of prospect theory and PMM, another set of com-
binations of problem domains and problem frames is designed (i.e.,
gain domain/negative frame vs. loss domain/positive frame). Accord-
ingly, the hypotheses based on the PMM theory are as follow:

H2a: According to the PMM theory, when the information of

a decision problem is stated in a gain domain/positive
frame, decision makers will choose the certain option
(no risk) over the risky option. When the information of
a decision problem is stated in a loss domain/negative
frame, decision makers will choose the risky option over
the certain option.
H2b: According to the PMM theory, when the information of
a decision problem is stated in a gain domain/negative
frame, decision makers will choose the risky option over
the certain option (no risk). When the information of a
decision problem is stated in a loss domain/positive
frame, decision makers will choose the certain option
over the risky option.

Fuzzy-Trace Theory
Based on previous research on the relationship between memory
and reasoning, Reyna and Brainerd (1990) derived fuzzy-trace theory
An Empirical Examination of Framing Effects 47

(FFT). This theory differs from prospect theory, which searches for a
psychophysical function for probabilities and outcome values, in that
FTT assumes individuals prefer to reason using simplified representa-
tions of information (i.e., gist), as opposed to exact details (Reyna and
Brainerd 1991a). Thus, according to FTT, while individuals are encod-
ing verbatim information, they extract global patterns from the infor-
mation presented and then mentally represent the decision problem
at different levels of specificity. This fuzzy-to-verbatim continuum of
representations allows decision makers the latitude to incorporate their
own personal, fuzzily processed preferences into the options. Typi-
cally, an overall impression of the task is derived to determine whether
gist-based processing is feasible (Ashcraft and Battaglia 1978; Gelman
1972). For example, would estimation, as opposed to calculation, suf-
fice to solve a numerical problem? That is, multiple representations
available in a task can be ordered according to a hierarchy of gist, and
gist-based reasoning is predicted to operate at the vaguest level in the
hierarchy that permits discrimination, given the constraints of the
task.
Reyna and Brainerd (1991a, 1995) used FTT to explain the classic
framing effect. When quantitative information is available, “relational
gist” (i.e., the notion that one option has “more” or “less” than the
other) is automatically extracted. That is, individuals generate a no-
tion based on “more” or “less” vs. “some” to distinguish between the
options. When the options involve null outcomes (e.g., nobody saved),
however, the comparison becomes “some” vs. “none” or “presence” vs.
“absence” of an attribute. Note that, as with numerical outcomes, prob-
abilities are represented dichotomously—certainty, a single possible
outcome, as opposed to uncertainty, more than one possible outcome.
This is presumed to occur even if people have access to more concrete
information. Hence, according to the FTT, the vague distinctions of
the options in the Asian disease problem can be stated as follows:
Program A: Some people will be saved.
Program B: Some people will be saved or no one will be saved.
Program C: Some people will die.
Program D: Nobody will die or some people will die.

Based on FTT, to make a choice between Programs A and B, “some

people will be saved” is common to both alternatives, and the difference
centers on “no one will be saved.” Hence, individuals prefer Program A.
In comparing Program C to Program D, “some people will die” is com-
mon to both alternatives, therefore, individuals focus on the different
part, that “nobody will die,” and prefer Program D. As is evident in the
studies of Reyna and Brainerd (1991a, 1995), removing all of the num-
bers from the classical disease problems and replacing them with vague
phrases does not eliminate the framing effect. Indeed, under these
48 Chang, Yen, and Duh

circumstances, the framing effects were more significant in magni-

tude than when numbers were used. That is, the reflected framing
data are explained as being the result of qualitative distinctions, not of
the detailed information or of calculations.
Stone et al. (1994) concluded that fuzzy-trace theory better ex-
plains framing effects. They claimed and confirmed that people de-
scribe the difference between risks of .006 and .003 as “low, but
significant, risk.” On the other hand, people perceive the difference
between risks of .000006 and .000003 as “essentially nil risk.” That
is, a fuzzy-processing preference serves to drive the representation of
quantities down to a hierarchy of gist. In addition, contemporary re-
searchers in the area of judgment and decision making have used FTT
to explore reasoning involved with conditional probability (Wolfe 1995),
social stereotypes (Davidson 1995), motivational biases (Klaczynski
and Fauth 1997), and various types of deduction, including causal
reasoning (Klaczynski and Narasimham 1998).
Note that when the negation “not” is added to the certain option
(e.g., the revised Programs A and C of Table 1), the certain option and
the risky option have no identical part; thus, individuals cannot sim-
plify the decision options to gist levels. Under this situation, FTT indi-
cates that decision makers must exert additional cognitive effort to
reach a decision. Klaczynski and Fauth (1997) adopted FTT to explore
self-serving bias. They found that when evidence contradicts cher-
ished beliefs about self, subjects struggle to overcome gist-based in-
terference in order to engage in quantitative reasoning. Consequently,
the same subjects exhibit more advanced reasoning (e.g., applying
statistical rules) in decision making. For more complex decision prob-
lems in accounting or management, one can assume that decision
makers may have to exercise reasoning at the numerical level when
options are different and cannot be simplified to gist levels.
According to FTT, if additional effort is exerted to make a decision
and the options suggest the same expected value at a numerical level,
then individual differences in risk preference may moderate the impact
of framing effects. Wang (1996) indicates that when a decision maker’s
risk preference is weak, she/he may become more sensitive to the fram-
ing effect; however, when a decision maker’s risk preference is strong,
she/he is more immune to the framing manipulation. Of interest in a
managerial accounting context is the question of the relationship be-
tween framing effects and individuals’ risk preferences when the al-
ternatives in a decision problem yield the same expected value.
In summary, fuzzy-trace theory predicts that the qualitative
relationships among numerical values, rather than the values them-
selves, govern the decision unless the individual cannot simplify the
decision options due to complex information. In other words, if cer-
tain options are described using gain domain/positive frame or loss
An Empirical Examination of Framing Effects 49

domain/negative frame (e.g., Programs A and C of Table 1), FTT predicts

that individuals will make decisions at the gist level, thus the framing
effect will exist. Therefore, the classic Asian disease test is ambiguous
because it confounds not only the effects of reflection and PMM, but of
fuzzy-trace, as well.
According to FTT, using the negation “not” in the certain options
(e.g., the revised Programs A and C of Table 1) provides information
that individuals cannot simplify to gist levels but which requires addi-
tional cognitive effort to reach a decision. In this case, the framing
effect will be absent. Accordingly, our hypotheses based on the fuzzy-
trace theory are as follows:
H3a: According to FTT, when the information of a decision
problem is stated in a gain domain/positive frame, de-
cision makers will choose the certain option (no risk)
over the risky option. When the information of a deci-
sion problem is stated in a loss domain/negative frame,
decision makers will choose the risky option over the
certain option.
H3b: According to FTT, when the information of a certain
option is stated in a gain domain/negative frame or in
a loss domain/positive frame, the framing effect will be
absent.

RESEARCH METHOD
Experiment 1 is designed to show the robustness of the classic
framing effect in a managerial accounting context and to see whether
the three theories have equal explanatory ability to predict this phe-
nomenon. The second experiment investigates which theory best de-
scribes decision behavior in an accounting context.
As Sanders and Wyndelts (1989) indicated, since the manipulation
of the independent variables in framing studies generally involved mere
changes in the wording of the scenarios, a within-subjects design was
not appropriate. We employed a 2 × 3 between-subjects design across
two experiments to avoid a possible demand effect of using a within-
subjects design (Pany and Reckers 1987). Two variables were manipu-
lated: problem domain (gain vs. loss) and problem frame (positive,
negative, and mixed). Table 2 summarizes the research design and
the experimental material and compares them with those of the clas-
sic Asian disease problem. The four situations included in Experi-
ment 1 are gain domain/positive frame, gain domain/mixed frame,
loss domain/negative frame, and loss domain/mixed frame. Experi-
ment 2 presents the business situations as gain domain/negative
frame, gain domain/mixed frame, loss domain/positive frame, and
loss domain/mixed frame.
 TABLE 2
50

A Summary of Experimental Design and Material Compared with the Classic Asian Disease Problem

Statements The Classic Asian Disease
(Alternatives) Problem
The U.S. is preparing for the
outbreak of an unusual Asian
disease, which is expected to
kill 600 people. Choice of one
from two options.
1 Certain 200 people will be saved.
2 Risky There is 1/3 probability that
600 people will be saved and
2/3 probability that no people
will be saved.
3 Certain 400 people will die.
4 Risky There is 1/3 probability that
nobody will die and 2/3
probability that 600 people
will die.
5 Certain 400 people will not be saved.
6 Certain 200 people will not die.
Perceived
Problem Problem
Experimental Material Domain Frame Experiment
The company’s current pollution
control system no longer meets
the minimum requirement. The
company may be subject to a
$300,000 punitive fine. Choice
of one from two options.
The company will, for certain, be able Gain Positive 1
to save $100,000 in punitive fine.
There is 1/3 probability that the Gain Mixed 1 and 2
$300,000 punitive fine will be
saved and 2/3 probability that
$0 punitive fine will be saved.
The company will, for certain, be Loss Negative 1
subject to a $200,000 punitive fine.
There is 1/3 probability that the Loss Mixed 1 and 2
company will be subject to $0
punitive fine and 2/3 probability
that the company will be subject
to a $300,000 punitive fine.
The company will, for certain, Gain Negative 2
not be able to save $200,000
in punitive fine.
The company will, for certain, Loss Positive 2
not be subject to a $100,000
Chang, Yen, and Duh

punitive fine.
An Empirical Examination of Framing Effects 51

Materials
The case used in both experiments is a capital investment sce-
nario. The subjects were asked to assume the role of controller at a
hypothetical company (TilTec Inc.). The experiments asked subjects to
choose between two options (A, a certain option, and B, a risky option)
for purchasing new equipment to meet newly announced environmental
protection standards.5 The subjects could write comments in spaces
provided in the case.

Experiment 1
In Experiment 1, the case scenario states that, due to recently
raised environmental protection standards, the company’s current pol-
lution control system no longer meets the minimum requirement. If no
improvement is made soon, the company may be subject to a $300,000
punitive fine. The controller must choose between two options, A and
B. The equipment in each option has the same useful life. Under both
options A and B, costs related to purchases, operations, and other
miscellaneous expenses, such as maintenance, are also identical.
For the gain domain condition, option A (positive frame) is stated
as “If the equipment under option A is purchased, TilTec will, for cer-
tain, be able to save $100,000 out of the $300,000 total punitive fine,”
and option B (mixed frame) is stated as “If the equipment under op-
tion B is purchased, there is a one-third probability that TilTec will
save all of the $300,000 punitive fine and a two-thirds probability
that TilTec will save $0 of the punitive fine.” For the loss domain con-
dition, option A (negative frame) is stated as “If the equipment under
option A is purchased, TilTec will, for certain, be subject to a $200,000
punitive fine,” and option B (mixed frame) is stated as “If the equip-
ment under option B is purchased, there is a two-thirds probability
that TilTec will be subject to a $300,000 punitive fine and a one-third
probability that TilTec will be subject to $0 punitive fine.” That is, the
expected values of both options are the same. For both domains, choos-
ing option A suggests a risk-averse attitude, while choosing option B
is risk seeking.
To test the predictive ability of each theory concerning the classic
framing effect in an accounting-related decision, we made the above
capital investment problem correspond with the Asian disease prob-
lem. Table 2 provides the comparison between the experimental
material and the classic Asian disease problem. In Table 2, statements
1, 2, 3, and 4 are formally and structurally equivalent to the Asian
disease problem and were used in Experiment 1. The first two state-
ments are for the gain domain, and statements 3 and 4 are for the

5 After performing the task, they were also asked to express their level of confidence in
their decisions (on a seven-point Likert scale, with 1 as “not confident at all” and 7
as “totally confident”).
52 Chang, Yen, and Duh

loss domain. The certain options, statements 1 and 3, are in the gain
domain/positive frame and the loss domain/negative frame, respec-
tively (see Table 2). Since the gain domain confounds with the positive
frame and the loss domain confounds with the negative frame, this
design does not separate the framing effect from the reflection effect.
Hence, based on our discussion in the previous theory sections, pros-
pect theory, PMM theory, and FTT all predict the presence of the clas-
sic framing effect in Experiment 1 (see Table 3).

Experiment 2
Experiment 2 is created to differentiate the explanatory power of
the three theories. The case scenario used in this experiment is the
same as Experiment 1, with some specific revisions of the certain op-
tions. Recall that, in predicting framing effects, prospect theory is con-
cerned with problem domains (gain vs. loss), while the theory of PMM
focuses on problem frames (positive vs. negative) and whether com-
plete information is provided in the decision problem or there is room
for individuals to take other relevant variables into consideration. The
FTT focuses on whether the stated options can be simplified or the
decision problem must be solved at a more complex level, such as by
the use of numerical computations. In Experiment 2, we design the
option statements in a manner that allows us to separate the effect of
the problem domain from the problem frame and in such a way that
the information cannot be simplified. This allows us to see the dis-
tinct prediction of each theory. The empirical results will provide us
evidence as to which theory can best describe the subjects’ behaviors.
In this experiment, we maintain the same statements for the risky
options (statements 2 and 4 in Table 2) and revise those for the cer-
tain options. Statement 5 is a revised version of statement 1 without
changing the fact in the statement (see Table 2). The problem domain
for both statements is the same (gain domain), but the problem frame
is changed from positive to negative. Similarly, statement 6 is modi-
fied from statement 3 to change the problem frame from negative to
positive with a loss problem domain. The purpose of these changes is
to make the revised statements for the certain options (statements 5
and 6) in the gain domain/negative frame and the loss domain/posi-
tive frame. Since the revised statements no longer confound the gain
domain with the positive frame and the loss domain with the negative
frame, we are able to create different predictions under each theory.
According to prospect theory, which is based on the reflection ef-
fect (problem domain), individuals are predicted to prefer the certain
option (statement 5) over the risky option (statement 2) in a gain do-
main and to prefer the risky option (statement 4) over the certain op-
tion (statement 6) in a loss domain.
Concerning the PMM theory, statement 2 provides complete infor-
mation, but statement 5 does not. Statement 5 reads, “The company
 TABLE 3
Hypotheses and Results

Experiment Hypothesis and Prediction Supporting Theory Confirmed or Not?

H1a: Number of subjects choosing Alternative 1 Prospect theory Yes
> Number of subjects choosing Alternative 2;
Number of subjects choosing Alternative 4
> Number of subjects choosing Alternative 3
H2a: Number of subjects choosing Alternative 1 PMM Yes
1 > Number of subjects choosing Alternative 2;
Number of subjects choosing Alternative 4
> Number of subjects choosing Alternative 3
H3a: Number of subjects choosing Alternative 1 FTT Yes
> Number of subjects choosing Alternative 2;
Number of subjects choosing Alternative 4
An Empirical Examination of Framing Effects

> Number of subjects choosing Alternative 3

H1b: Number of subjects choosing Alternative 5 Prospect theory No

> Number of subjects choosing Alternative 2;
Number of subjects choosing Alternative 4
> Number of subjects choosing Alternative 6
H2b: Number of subjects choosing Alternative 5 PMM No
2 < Number of subjects choosing Alternative 2;
Number of subjects choosing Alternative 4
< Number of subjects choosing Alternative 6
H3b: Number of subjects choosing Alternative 5 FTT Yes
= Number of subjects choosing Alternative 2;
Number of subjects choosing Alternative 4
53

= Number of subjects choosing Alternative 6

54 Chang, Yen, and Duh

will, for certain, not be able to save $200,000 punitive fine.” According
to the PMM theory, decision makers consider more variables than just
the target variable when information is not complete. For example,
they may suspect that the government will eventually come down hard
on companies that do not significantly improve pollution controls.
Therefore, subjects are predicted to interpret statement 5 as “The com-
pany will, for certain, not be able to save $200,000 punitive fine now,
and it may not be able to save the rest of the fine.” That is, according
to PMM, individuals are predicted to prefer statement 2 over state-
ment 5. On the other hand, statement 6 reads, “The company will, for
certain, not be subject to a $100,000 punitive fine.” This could be
interpreted as, “The company will, for certain, not be subject to a
$100,000 punitive fine, and it will not be subject to the rest of the
fine.” Hence, individuals are predicted to prefer statement 6 over state-
ment 4.
The FTT expects individuals to simplify the decision problem to
gist level. When the problem cannot be simplified, the FTT indicates
that individuals will solve the problem at a more complex level using
numerical computations. If the numerical results of the two alterna-
tives are the same, then risk preference is predicted to influence the
final decision. In Experiment 2, since the two options have no similar
part, they cannot be simplified to make an easy decision. That is, to
make a comparison, individuals must solve the problem at the nu-
merical level by calculating the expected value for each option. Since
the expected value is the same for both options, the driving factor is
predicted to be the individual’s risk attitude. Table 3 summarizes the
hypotheses and predictions of each theory.

Subjects
Eighty-six students6 participated in Experiment 1, and 185 students7
participated in Experiment 2. All subjects were recruited from two met-
ropolitan, state universities on the West Coast and had completed a
managerial accounting course. During the recruitment, subjects were
told that they would be engaging in a judgmental task related to a busi-
ness decision. The subjects were also assured that their responses would

6 The subjects had an average of 1.48 years of accounting-related work experience,

with a standard deviation of 2.44 years. The average age for this group was 26.48 years.
On a seven-point Likert scale, the subjects were asked to evaluate the experimental
materials. The statistics indicate that the case was interesting (with mean and stan-
dard deviation 4.70 and 1.15, respectively) and understandable (with mean and
standard deviation 4.72 and 1.21, respectively).
7 The subjects had an average of 0.22 years of accounting-related work experience,
with a standard deviation of 0.84 years. The average age of subjects in this group was
24.82 years. The subjects indicated that the case was interesting (with mean and
standard deviation 4.89 and 1.19, respectively) and understandable (with mean
and standard deviation 5.00 and 1.23, respectively).
An Empirical Examination of Framing Effects 55

be handled confidentially and that data would be analyzed only in

groups. The subjects were not told the nature or the objective of the
experiments.

Experimental Procedures
Upon arrival at the experiment sites, subjects were randomly as-
signed to each treatment and given a one-page instruction sheet. This
sheet provided a short description of the experiment and stated that
there are no right or wrong answers to the experimental task. The
subjects were instructed to make their own judgments based on the
case scenario. Then, the subjects were asked to study the managerial
case and make a choice between two alternatives. Finally, the sub-
jects completed a post-experiment questionnaire that contained both
demographic and risk-attitude questions. Subjects took, on average,
approximately 20 minutes to complete the experiment.

RESULTS
Experiment 1
The purpose of Experiment 1 was to test the robustness of the
classic framing effect in a managerial accounting context. As Table 4
indicates, when the options were stated in the gain domain, 29 and
13 students chose options A (the certain option) and B (the risky op-
tion), respectively. That is, approximately 31 percent of the subjects
preferred a risky alternative. On the other hand, when the options
were stated in the loss domain, 16 and 27 students chose options A
and B, respectively. That is, approximately 63 percent of subjects
tended to be risk seeking in that situation. As shown in Table 4, the
Chi-square result indicates a significant difference (Chi-square = 8.645,
p < 0.003).8 This finding supports H1a, H2a, and H3a that prospect
theory, PMM, and FTT all predict the classic framing effect in a mana-
gerial accounting context.

8 Since expressing “no difference” between alternatives is not permitted in our experi-
ments, subjects could have been forced to choose an alternative. We next designed a
test to confirm our Chi-square result. The dependent variable of this test is created
by multiplying the subject’s confidence level (1 to 7) with the option chosen. The no
risk/certain option is coded 1, and the risky option is coded –1. If the subjects were
indeed coerced into making their choices, their confidence levels about their deci-
sions should be low (1 or 2 on a seven-point Likert scale). Hence, no matter which
option is chosen, according to our design, the dependent variable from coerced sub-
jects should be low. Thus, the result of this ANOVA test may be insignificant, even
though the Chi-squared is significant. On the other hand, if the subjects were not
forced to make their choices, then their confidence levels should not be low. There-
fore, the results of the ANOVA should be the same as the result of the Chi-square.
Such is the case in experiment 1 (F = 11.693, p < 0.001). That is, the ANOVA result
confirms our Chi-square findings in Experiment 1.
 56

TABLE 4
Number (Percentage) of Subjects Choosing Each Alternative in Experiments 1 and 2

Framing Statistical Tests

Positive Negative Cross Tabulations Framing
Certain Option Risky Option Certain Option Risky Option Chi-square p Effect
Experiment 1 29 (69.0%) 13 (31.0%) 16 (37.2%) 27 (62.8%) 8.645 0.003 Yes

Experiment 2 47 (51.1%) 45 (48.9%) 51 (54.8%) 42 (45.2%) 0.261 0.660 No

Chang, Yen, and Duh
An Empirical Examination of Framing Effects 57

Experiment 2
Experiment 2 is designed using a revised version of the classic Asian
disease problem to differentiate among the descriptive abilities of pros-
pect theory, PMM, and FTT with regard to the impact of information
presentation on decision makers’ behaviors. As reported in Table 4,
when the options in Experiment 2 were stated in the gain domain, 47
students chose the certain option, A, and 45 chose the risky option, B.
That is, in such a situation, about 51 percent of the subjects were risk
averse, and 49 percent were risk seeking. On the other hand, when the
information was stated in the loss domain, 51 subjects chose option A
and 42 chose option B. That is, a total of 55 percent of the subjects
were risk averse, and 45 percent were risk seeking. The Chi-square
result indicates no significant difference (Chi-square = 0.261, p < 0.660).9
As shown in Tables 3 and 4, this result supports the predictions of FTT.
Our finding is consistent with that of Stone et al. (1994), which sug-
gests that individuals reason on the basis of simplified representations
rather than on the literal information available.

Additional Analysis (Framing Effects and Risk Preference)

Fuzzy-trace theory indicates that if different options cannot be sim-
plified to gist-vague levels, then decision makers may need to exercise
reasoning at the numerical level. If the options’ outcomes result in the
same numerical level, then the decision is predicted to be affected by
the decision makers’ risk propensity. Wang (1996) and Zickar and
Highhouse (1998) found that individuals’ risk preferences, as well as
framing, affected their subjects’ decision making. To confirm this pre-
diction of FTT, we further analyzed subjects’ choices in both Experi-
ments 1 and 2.
Using subjects’ choices as the dependent variable, we conducted
ANCOVA tests with the subjects’ risk preferences10 as the covariate.
The results shown in Table 5 support the prediction that if an option is
stated in such a way that it can be simplified (i.e., Experiment 1), then
the framing effect is present, and the individual decision maker’s risk
preference is not the driving factor in making the decision (Panel A of
Table 5, p < 0.779). On the other hand, when the option cannot be

9 According to Kirk (1995), the size of the effect (f = 0.355) in Experiment 1 is between
medium (f = 0.25) and large (f = 0.40). If we set (1) the level of significance α = 0.05,
(2) power 1 – β = 0.9, and (3) medium effect size (f = 0.25), the necessary sample size
of Experiment 2 should be 168 (for details, please refer to Kirk [1995, 187 and Table
E.13]). Since the actual sample size of Experiment 2 is 185, our finding is not simply
a consequence of low statistical power. The power of Experiment 2 is higher than
0.9.
10 We used both self-reported risk attitudes and a validated risk propensity test (Kogan

and Wallach 1964) to measure subjects’ risk preferences. Pearson correlation sug-
gested these two measures are correlated (r = .261, p < 0.001). In ANCOVA tests, we
used the measurement resulting from the risk propensity test.
58 Chang, Yen, and Duh

TABLE 5
ANCOVA Results on Subjects’ Choices
with Risk Preference as Covariate

Panel A: Experiment 1
Source Mean Square df F p
Risk Preference 2.041 1 0.079 0.779
Framing 298.635 1 11.591 0.001
Residual 25.765 82

Panel B: Experiment 2
Source Mean Square df F p
Risk Preference 230.771 1 8.860 0.003
Framing 0.991 1 0.038 0.846
Residual 26.039 181

simplified and the numerical conclusions reveal an equal outcome of

the options (i.e., Experiment 2), the framing effect is absent and the
individual’s risk preference drives the decision (Panel B of Table 5,
p < 0.003).

DISCUSSIONS AND CONCLUSIONS

To determine which theory can best explain the well-known fram-
ing effect in making an accounting-related decision, this study exam-
ined three competing theories, prospect theory, probabilistic mental
models, and fuzzy-trace theory. The results suggest that FTT best de-
picts the phenomenon of framing effects on decision makers’ behavior
in an accounting context, though prospect theory has been applied
most commonly.
Consistent with Simon’s (1956) suggestion that individuals are
usually bound by human cognitive limitations, FTT suggests that de-
cision makers prefer to reason using greatly simplified, summarized
representations of information, as opposed to exact details (Reyna and
Brainerd 1991a). That is, individuals tend to process information us-
ing qualitative patterns rather than precise quantities such as prob-
ability values or numerical outcomes. FTT further suggests that
decision makers tend to process information at a numerical level if
the information cannot be pictured qualitatively (i.e., at a gist level).
When the numerical outcomes of the different alternatives are identi-
cal, the driving factor in making the decision is an individual’s risk
preference. The results from this study support the predictions based
on FTT. We observed framing effects in a managerial accounting con-
text when the information presented could be extracted to a gist level.
On the other hand, framing effects were absent when the information
could not be simplified. The subjects’ written comments also support
An Empirical Examination of Framing Effects 59

the FTT. For example, in Experiment 2, one participant who chose

option A (the certain option) stated that option B has the same out-
come as option A in terms of the expected amount of punitive fine to
be paid, but it is far more risky than option A. That is, she/he made
the choice based on a personal risk preference. Another comment reads,
“At first glance, both options are the same, but the second is risky.”
There are several implications from this study. The results of Ex-
periment 2 support fuzzy-trace theory by showing that if individuals
cannot simplify the information, then they process the information at
the numerical level. One implication of this finding is that it might be
possible to force decision makers to process information at a higher
level by presenting information in certain formats (cf., Libby and Luft
1993). Since decision biases may depend on how information has been
prepared by accountants, a reporting system should be designed to
alleviate framing effects by presenting financial information that can-
not be easily summarized into vague wordings.
More importantly, when auditors exercise their professional judg-
ments, they are also influenced by how information (e.g., financial
information or audit evidence) has been presented to them. Because
managers are allowed to use their own discretion in framing state-
ments for annual reports that communicate company information to
users of financial statements (Healey and Palepu 1993), it is possible
for managers to mislead users of financial statements or to mask im-
proper actions such as fraud (Johnson et al. 1991). An understanding
of framing effects may assist auditors in detecting questionable repre-
sentations (Jamal et al. 1995).
Finally, the finding of a relationship between framing effects and
individuals’ risk preferences calls attention to the dynamic features of
framing effects. As Wang (1996) suggested, the possible interaction
effect between risk preference and frames may be contingent upon
the specific task domain. Our results echo Arnold’s (1997) speculation
that the framing effects found in previous auditing research (e.g.,
McMillan and White 1993) may be related to the various levels of risk
inherent in the audit environment. Future studies investigating the
antecedent conditions that determine the direction and presence of fram-
ing effects could provide useful insights to the accounting profession.
There are some limitations of this study. First, as with other stud-
ies in this line of research, the external validity might be restricted.
Since subjects in this study were undergraduate business majors, their
experience in making capital investment decisions is limited. To im-
prove external validity, future studies could recruit subjects with task-
specific experience. In addition, since the scenario of our study was
simplified, researchers should also consider developing cases with more
realistic/complex scenarios to investigate whether the fuzzy-trace
theory is better than other competing theories for explaining framing
effects.
60 Chang, Yen, and Duh

Third, the wording used in our experiments to manipulate differ-

ent decision domains may not have been salient to the subjects. For
example, in our second experiment, it is possible that subjects would
have been more sensitive to wording “penalized with” rather than “sub-
ject to…punitive fine.” For example, Luft (1994) found that employees
are more likely to accept incentive contracts described in bonus terms
rather than contracts that appear identical except for being described
in penalty terms. She explained this phenomenon in terms of the hu-
man information-processing costs of communicating and evaluating
the contract terms. Therefore, our results should be interpreted with
caution.
In addition, we did not directly ask the subjects to indicate their
perceived problem domain vs. problem frame during the experiments.
Instead, we provided them with spaces for overall comments on the
case scenario. There were 157 subjects (57.93 percent) who commented
on the case scenario (44 out of 86 for Experiment 1 and 113 out of 185
for Experiment 2). In Experiment 1, 8 out of 44 subjects (18.18 percent)
mentioned that their calculations indicated two options having the same
expected value. In Experiment 2, 39 out of 113 subjects (34.51 percent)
indicated that the expected values of options A and B are the same. The
difference is significant (t = 2.007, p < 0.047), which indirectly supports
FTT’s prediction that individuals tend to solve a problem at the numeri-
cal level if they cannot simplify the problem. Concerning PMM’s predic-
tion on information completion, two (three) subjects in Experiment 1
(2) stated the descriptions of the option outcomes as not enough or not
complete. This result does not seem strong enough to support the pre-
dictions of PMM. It is critical that future studies conduct manipulation
checks to directly confirm the predictions of these theories.
Future research should clearly distinguish between the various
aspects of framing, such as standard risky choice, attribute framing,
and goal framing, in experimental designs. In addition, studies in at-
tribute framing that investigate decision types, rather than simply
making choices between options, may warrant further examination.
For instance, consider auditing tasks that involve professional judg-
ments in environments with relatively little structure where auditors
usually make assessments with a great level of cognitive effort. Since
the case scenario in the current study is quite structured and limited
to specific choices, the extent to which framing effects still prevail in
unstructured accounting/auditing assessments/judgments remains
unanswered. If framing effects do indeed exist in these contexts, then
steps need to be taken soon to improve the quality of the decisions by
developing remedial approaches and techniques. Kühberger (1995) has
suggested that providing complete information can alleviate the impact
of framing effects. Future studies should focus on how to implement
such an approach at a reasonable cost and on learning how accounting
information can be presented to yield higher quality decisions.
An Empirical Examination of Framing Effects 61

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