An experiment to detect the existence of

Frame Dependence
Submitted in partial fulfilment of the course Behavioral Finance

Under the guidance of Prof. Madhumita Chakraborty

Term-V

December, 2020

PGP35, Group 9

Members:
Name PGP ID
Guneet Kaur PGP35015

Sahil Dhingra PGP35282

Swayam Prabha PGP35296

Jellybean Singh PGP35320

Divij Kashyap PGP35359

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 Contents

Introduction and Literature Review ........................................................................................................ 3

Research Methodology............................................................................................................................... 4

Findings and Analysis ............................................................................................................................... 6

Conclusion.................................................................................................................................................... 8

Exhibits ......................................................................................................................................................... 9

References................................................................................................................................................... 12

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 Introduction and Literature Review

Behavioral Finance is the study of psychological influence on the behaviour of investors and

financial analysts. It constitutes a deep knowledge of “biases” which is basically an inclination

towards or against something. They can either be positive or negative in nature. Biases are often

based on stereotypes, rather than actual knowledge of an individual and these can lead to cognitive

shortcuts and discriminatory decision making. Despite being disciplined, humans have the

tendency to fall prey to these biases which cause them to act on emotions. Some of the key biases

which are relevant in the field of finance are Frame-Dependence,-Representativeness-bias,

Endowment effect, Mental accounting, Disposition effect and more.

Frame Dependence
Frame dependence means that the way people respond to situations depends on how the situation

is presented or framed, rather than on the actual facts of the situation. In the field of investment,

investors are more influenced by how the information is being presented to them. Thus,

investment companies make use of this bias while making products. Framing is related to the

decision maker’s conception of risk (Tversky and Kahneman, 1979). When a risky option is

relatively unattractive, a weak framing effect is observed in such cases (Ert and Erev, 2013).

Contrary to this, when both options are equally attractive in relative terms, higher attractiveness

increases framing bias.

Guarding against Frame dependence

Individuals can guard themselves against this bias by rephrasing the information which is being

presented and then make its conclusion. The key here is to make your thought process logical and

have a reflective approach for decision making. The aim should be to avoid making impulsive and

reflexive decisions. For instance, equity research report comes in with a lot of opinion and bias

included in the research itself. As an investor, one should beware of such biases and just look at

key numbers and underlying valuation. Post this analysis, the investor should arrive its conclusion
and not be swayed by how the information is presented.

This paper studies the existence of Frame dependence by examining the responses of two sample

groups on the same set of information but presented in a different frame.

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 Research Methodology

I. Research objective
The aim of this study is to study the existence of Frame dependence during investor decision-

making.

II. Research hypothesis

Null Hypothesis (H0): Frame dependence does not have an influence on the investor’s decision

Alternate Hypothesis (H1): Frame dependence has an influence on the investor’s decision

III. Research instrument:

In order to achieve the objectives and answer the research question of this study, a survey-based

design using survey-based data was adapted. The research instrument used in this study was a

questionnaire through Google Forms. A preliminary questionnaire was designed to obtain

sufficient information to draw usable conclusions in respect of the possible influence of frame

dependence on investment decision making. The questionnaire was designed to be as brief and as

practical as possible to complete, in view of the amount of information needed.

The first section of the questionnaire provided context about the decision-making situation that

they were presented with. The second section of the questionnaire requested participants to

provide their investment decision of ‘Buy or Sell’ basis the brief information (stock price graph)

available.

The stock chosen (identity hidden from respondents) was Indiabulls Housing Finance Ltd. (ticker
symbol IBULHSGFIN) as it was a hot stock for day trading when this experiment was conducted.

IV. Research Groups

The questionnaire was modified to be sent to two different research groups under each sample set

of survey respondents:

1. Experimental Group: The questionnaire was framed in a negative frame with negative

colours (red) and callouts to influence the sub-conscious minds of the people in the

decision-making process. Refer Exhibit 1 for the questionnaire.

2. Control Group: A neutral questionnaire was shared with this group so that they could use

their rational decision-making process. Refer Exhibit 2 for the questionnaire.

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V. Sampling
The experiment was conducted on 2 sets of samples:

1. Behavioral Finance (BF): People educated about behavioural finance concepts and biases

2. Non-Behavioral Finance (Non-BF): People unaware of the behavioural biases

Two different sample sets were considered to analyse if education about biases actually makes

people conscious of their decision-making process and forces them to reconsider their decision
before finalizing it to check if they are influenced by any bias.

The questionnaire for the BF groups was shared within the classroom and a window of 30 seconds

to a minute was provided to the sample set to respond. And the Non-BF sample set was shared

the questionnaire over email.

Sample size: A total of 120 responses were received from across the 2 sample sets and the 2 types

of groups. The responses received were compared across the different groups to analyse how

frame dependence impacts the decision-making process of the respondents.

It is acknowledged that one of the limitations of the study is that the sample size is relatively small.

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 Findings and Analysis

The survey conducted yielded the following results:

Experimental Groups:

Non-Behavioral Finance Behavioral Finance

33 responses 29 responses

Figure 1: Experiment Group (Non-BF) Figure 2: Experiment Group (BF)

Control Groups:

Non-Behavioral Finance Behavioral Finance

28 responses 30 responses

Figure 3: Control Group (Non-BF) Figure 4: Control Group (BF)

Analysis: The null hypothesis cannot be accepted

I. Experimental vs Control Group

- There is a significant difference between the responses of the experiment group vs the

control group.

- The actual stock price increased from Rs 184.6 at 13:30 hours (the last price point shown to

respondents) to Rs 185.25 at 14:00 hours and even further to Rs 191.7 at 14:30 hours. Hence,

a “BUY” was the ideal response. Refer Exhibit 3 for the extended movement of the stock price.

- However, as it can be seen from the 4 figures above, majority of the experimental group

respondents preferred to “SELL” the stock (Figure 1 and 2) whereas the case was opposite

where the respondents were not shown the frame (Figure 3 and 4).
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 - It highlights the bias that plays in the minds of people when the same set of information is

presented to different groups in seemingly different ways i.e. frames. When the individuals

were shown a frame of a red background with an anxious expression, they gave in to the

bias and associated emotions of “loss”, “fear”, “danger”, and the like to propose a Sell

recommendation.

II. Intra-Experimental Group (Non-BF vs BF)

- It can be seen from Figures 1 and 2, that the percentage of respondents administering a Sell

rating in the cohort of respondents who were students of the subject “Behavioral Finance”

(55.2% in Figure 2) is lower than those who were not (72.7% in Figure 1).

- This highlights the importance of education and how the knowledge of such biases can

effectively protect investors from potential downside risks and fallouts of investing. The

mere understanding of frame dependence could have consciously encouraged the BF

Experimental Group to think rationally and emotionally.

Thus, frame dependence seems to be working in our study depicting effect on an individual’s
behaviour while making financial decisions.

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 Conclusion

The experiment described here was an endeavour to find out whether different frames influence

our decisions. The experiment was carried out on two groups of people – first, students of IIM

Lucknow who were in Behavioral Finance course (BF), and second, IIM Lucknow students who

were not in Behavioral Finance course (Non-BF). It was found out that presentation of information

does influence most of us. While education about biases helps control our emotions while making
financial decisions (or decisions in other domains too), some bias still plays out.

Stock markets are extremely sensitive to fear. Fear compels the System 1 of our brain to block the

more rational System 2 from functioning. The frame in which the question was presented to

experimental group also triggered fear and panic, and led people to sell without analysing the

situation carefully. Similar situation happens when stock markets dip. Panic and herd behaviour

make more people exit good stocks, and the smallest of unrelated signals gets amplified to

influence investor sentiments.

The fact that Behavioral Finance students also demonstrated some influence of the frame can be

extrapolated to hint that even financial experts have their own biases. Frame dependence thus has

far reaching impact on the multitude of financial decisions we make every day. Our friends,

acquaintances and experts give us copious amount of information, all coloured by biases and

current emotional states. It is for us to be aware of their psychology and our own biases, and take

informed rational decisions using System 2 of our brains.

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 Exhibits

Exhibit 1. Experimental Group Questionnaire

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Exhibit 2. Control Group Questionnaire

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Exhibit 3. Extended stock price movement for IndiaBulls

Hourly stock price (extended beyond 13:30 hours)

192
191
Point till which
190
graph was
189 presented to
188 respondents
187
186
185
184
183
182
15:00
15:30
09:30
10:00
10:30
11:00
11:30
12:00
12:30
13:00
13:30
14:00
14:30
15:00
15:30
09:30
10:00
10:30
11:00
11:30
12:00
12:30
13:00
13:30
14:00
14:30

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 References

1. Lowies, G., Hall, J., Cloete, C. (2013 November). The Influence of Frame Dependence on

Investment Decisions made by Listed Property Fund Managers in South Africa. Journal of

Economics and Behavioral Studies Vol. 5, No. 11, pp. 805-814

2. Wahla, K. U. R., Akhtar, H. and Shah, S. Z. A., (2019). Framing Effect and Financial

Wellbeing: Role of Investment Behaviors as Mediator, Review of Economics and Development

Studies, 5(2), 343-354

3. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/framing-

bias/

4. https://www.investopedia.com/terms/b/bias.asp

5. https://www.psychologytoday.com/intl/basics/bias

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