Framing Effect
The cognitive bias where decision-making is influenced by how information is presented rather than the information itself.
What is Framing Effect?
The framing effect describes how the same factual information can produce different decisions depending on whether it is presented positively or negatively. In finance, a fund described as having a '90% success rate' versus a '10% failure rate' elicits different reactions despite conveying identical information. Investors respond more favorably to '95% capital preservation' than to '5% maximum loss' for the same product. Framing influences responses to earnings announcements, analyst recommendations, and portfolio performance reviews. Financial marketing and media routinely exploit framing to influence investor behavior.
Example
Kahneman and Tversky's classic experiment: when told a medical procedure has a '90% survival rate,' people overwhelmingly chose it. When told the same procedure has a '10% mortality rate,' many refused — despite the outcomes being identical. In investing, an annual return of '−5%' feels worse than 'the market fell 20% and your portfolio fell only 15%,' even though both describe the same loss in isolation.
Source: Kahneman & Tversky — The Framing of Decisions (1981)