Framing Effect

Heera, Neha, Sai Vaishnavi, Kritvi

 ❏ Considered a part of a normative model
❏ In this theory- you multiply the utility of an
outcome by the probability of that outcome that
yields the highest number.

Example:

Expected Utility Theory There are 2 gambles

Gamble A: $10 for certain

Gamble B: 6% of $200

Since this is a normative theory- you would take

the risk of taking gamble B

The expected utility of the option A is 10 x 1 = $10

The expected utility of option B is 200 x 0.06= $12


Prospect Theory
Individuals think about utilities as changes
from a reference point
❏ Aim of prospect theory was to devise a descriptive
theory of decision-making under risk.
❏ Founded on concept of loss aversion which is a tendency
where investors are so fearful of losses that they focus
on trying to avoid a loss more so than on making gains.
Loss aversion: The idea that losses loom larger than
gains, despite the size of the loss.
❏ People tend to overweigh options that are certain, and
are risk averse for gains. We would rather get an
assured, lesser win than take the chance at winning
more (but also risk possibly getting nothing). The
opposite is true when dealing with certain losses:
people engage in risk-seeking behavior to avoid a
bigger loss.
❏ Example: When given a choice of losing 10% of $1000
or having a 90% chance of winning $1000, most would
choose the latter, despite both choices being the same.
Source: https://www.nngroup.com/articles/prospect-
theory/
 - Divided subjects into two groups and gave them a
particular problem that was based on a hypothetical
situation (in this case, a virus outbreak causing 600
deaths)
- Each group was given two alternate programs to

Tversky and Kahneman -

combat the disease
In group 1, program A stated that 200 people will be

(1981) saved and program B stated that there was a ⅓

probability that all 600 people would be saved and ⅔
probability that no one would be saved
- In group 2, program A stated that 400 people will die
and program B stated that there would be a ⅓
probability that no one would die and ⅔ probability that
600 people would die
- There was a notable difference between the number of
people who chose a program in each group. Reason:
Shift in reference point (in terms of gains or losses)
- It was concluded that the judgement shifts based on
this reference point.
 ❏ Depending on whether outcomes are ‘’framed’’
as gains or losses- you receive a different
judgment from different people.
❏ Subjects are generally more willing to take risks
to avoid a loss.
❏ The basic is ‘’Avoiding Risks but taking risks to
avoid losses’’
The Framing Effect
~Thank You Everyone~