Decision framing

Last week my group read and presented in the class paper called Choices, Values and Frames written by D. Kahneman and A. Tversky.



First part of the paper focuses on an approach to risky choice especially on hypothesis based on prospect theory. Because we already talked about prospect theory in previous lectures I am going to focus on a second part of the paper were authors discuss framing effect and framing of outcomes.



Risky prospects are characterized by their possible outcomes and by the probabilities of these outcomes. The same option can be framed or described in different ways. Look at following example :


•Problem1

•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.
•If Program A is adopted, 200 people will be saved. (72%)
•If Program B is adopted, there is one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved (28%)


•Problem 2

•If Program C is adopted, 400 people will die (22%)
•If Program D is adopted, there is a one-third probability that nobody will die and two-thirds probability that 600 people will die (78%)

In the first problem as expected preferences are risk averse ( people prefer saving 200 lives for sure then gamble). In the second problem people showed risk seeking preference for gamble. As we can see those two problems are the same.
One of the processes that control the framing of outcomes and events is framing effect. This public health problem above illustrates a framing effect in which change of wording from "lives saved" to "lives lost" induced a shift of preference from risk aversion to risk seeking. Framing effect can occur without anyone being aware of the impact of the frame on the decision. It can be exploited deliberately to manipulate the attractiveness of options.

After, authors moved on to analyse mental accounting that specifies the advantages and the disadvantages associated with the multiattribute option.
They suggested, that people will spontaneously frame decisions in terms of topical accounts. A topical account relates the conseqences of possible choices to a reference level that is determined by the context within which the decision arises. The following problem illustrates example of mental accounting in which the posting of a cost to an account is controlled by topical organization:


•Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theatre you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered.
•Would you pay for another ticket?
•Yes (46%) No (54%)

•Imagine that you have decided to see a play where admission is 10$. As you enter the theatre you discover that you have lost a $10 bill
•Would you still pay $10 for a ticket for the play?
•Yes (88%) No (12%)

Why are people unwilling to spend $10 after having lost a ticket if they would spend that sum after loosing $10 cash? According to topical org anization, going to the theatre is normally viewed as a transaction in which the cost of the ticket is exchanged for the experience of seeing the play. Buying a second ticket increases the cost of seeing the play to a level that is unacceptable for many people. In contrast the loss of cash is not posted to the account of the play and it doesn`t affect the purchase of the ticket.

Losses and costs are described at the end of the article.Many decision problems take the form of a choice between status quo and accepting an alternative ( which is advantageous or in some aspects disadvantageous). Advantages of alternative options will be evaluated as gains and disadvantages as losses. Thaler used the term endowment effect to describe the reluctance of people to part from assets that belong to their endowment. It is more painful to give up an asset than it is pleasurable to obtain it, buying prices will be significantly lower than selling prices.

I will finish here because my group is going to read a paper about endowment effect for friday`s lecture. I will write some more about it next week.