Framing can distort perception of risk from "summary" of Your Money and Your Brain by Jason Zweig
When you consider the risks involved in an investment, how you frame them can greatly influence your perception of those risks. Framing is a powerful psychological force that can shape how we interpret information and make decisions. For example, if you are presented with the potential gains of an investment first, you may be more likely to take on higher risks because the positive framing of the gains may overshadow the negative framing of the risks. On the other hand, if you are presented with the risks first, you may be more cautious and risk-averse in your decision-making. Framing can also distort our perception of risk by making certain risks seem more or less significant than they actually are. For instance, if an investment is framed as having a 90% chance of success, you may focus on the high probability of success and overlook the 10% chance of failure. This can lead you to underestimate the true risk involved in the investment. Conversely, if an investment is framed as having a 10% chance of failure, you may focus on the low probability of success and overlook the 90% chance of success. This can lead you to overestimate the true risk involved. Moreover, framing can influence how we react to losses and gains. Research has shown that people tend to be more risk-averse when faced with potential losses, and more risk-seeking when faced with potential gains. This bias, known as loss aversion, can cause us to make irrational decisions based on our emotional responses to losses and gains. By framing risks in terms of potential losses or gains, we can manipulate how people perceive those risks and influence their decision-making.- Framing plays a crucial role in shaping our perception of risk. By understanding how framing can distort our perception of risks, we can become more aware of the biases that influence our decision-making. It is important to consider how risks are framed when evaluating investments and to try to look at them objectively, taking into account both the potential gains and losses involved.
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