Framing From Experience : Cognitive Processes And Predictions Of Risky Choice Essay

Kahneman’s article is an analysis of intuitive thinking and how it guides our decision-making. Although primarily aimed at the field of psychology, it is an interdisciplinary article with applications in economic theorising. Kahneman attempts to differentiate between two systems of thought, one of intuition (system 1) and one of reasoning (system 2), and argues that many judgements and choices are made intuitively, rather than with reason (a slower and more deliberate process). Intuitive decision making, which encompasses heuristics, although generally more efficient and rapid, makes the agent potentially subject to errors due to framing effects or violations of dominance. The analysis of the studies and theoretical situations also provides criticism of the commonly held model of the rational agent within economics. The article also further conceptualises Kahneman’s theory, the Prospect Theory (Kahneman & Tversky, 1979), which has descriptive applications of people’s choice in decision-making situations involving risk and known probability of outcomes. These situations are typically unexplained by the more normative rational agent model.

“Judgment framing” occurs early in the judgment process. The definition of framing follows: Frames are mental structures that we use, usually subconsciously, to simplify, organize, and guide our understanding of a situation. They shape our perspectives and determine the information that we will see as relevant or irrelevant, important or unimportant. Frames are a necessary aspect of judgment, but it is important to realize that our judgment frames provide only one particular perspective.

One factor that influences a person’s choice to take a risk would be their emotions. People tend to make decisions based on their emotions over logical thought. Alan Sanfey found through his ultimatum game, that despite the knowledge that if people rejected the sum of money offered they would get nothing, people rejected the money when they felt the split was unfair. This rejection is thought to have occurred because people were angry that the money was not split fairly (Goldstein, 2015, p.386). Personally, I consistently lost spins, despite that I was more likely to win. I became a bit annoyed, and since it was not real money, I decided to just keep spinning the well to see what would happen. Another factor that could influence a person’s likeliness to engage in risky behavior is his or her observations. Even when a person knows everything about a situation, he or she may make a decision based on how he or she perceives the situation. This may occur because of the framing effect, as a different way of wording a situation may cause a person to alter their decision. Veronica Denes-Raj and Seymour Epstein had subjects try to pick red jellybeans out of a bowl filled with white beans. People tended to choose the bowl that had more red beans, despite knowing that there was a lower probability of picking a red bean. The increased number of red beans increased their confidence in their ability to pick a red bean, even if the probability was lower (Goldstein, 2015,

Dennis Chong and James N. Druckman define framing as the process by which people develop a particular conceptualization of an issue or reorient their thinking about an issue. Chong and Druckman found that people who are better informed about the issues are more likely to have established a frame of reference for their opinions and are less likely to be swayed by how other people frame the issues for them. This could be seen as the opposite of a favored frame, because it is intentional by the government or media, at times, that particular information is left out or have more emphasis compared to other frames in order to win over the public. On the other hand, Walter Lippmann is talked about in Mccombs and Ghanem’s piece. He believed that ‘much of the behavior underlying public opinion is a response to mental images of events, an imagined pseudoenvironment that is treated as if it were the real environment.

First we should begin by defining what framing really is. Framing is when information is presented

Describe factors that guide decision making and explain how overconfidence, belief perseverance, and framing can affect judgement.

The human mind is a fascinating thing, doing more work then we can possibly imagine and much more than we ever think about. The conscious part of the mind that controls our decision making abilities is itself controlled by many forms of biases operating both in the conscious and unconscious parts of the mind , many of which we never realize are even there. These decision affecting biases can be the difference between making a wise decision and a bad one. One such instance this holds true for is when deciding rather it’s time to give an employee a raise or not.

The ‘‘framing effect’’ is observed when the description of options in terms of gains (positive frame) rather than losses (negative frame) elicits systematically different choices. (Gonzalez 2005) The classic example of this is what chances do you take in the event of a deadly outbreak.

Prospect theory. The theory can be represented by a value function, as shown below. The value function starts from a reference point, and is normally concave for gains, and convex for losses. It is also steeper for losses than for gains. The theory intends to explain why people behave irrationally when making choices.

According to van der Pligt (2001) the study of human decision-making is an interdisciplinary project including economics, statistics as well as psychology, and moreover, decision making behavior involving almost all branches of psychology. After three weeks’ simulation of trading on Australian Stock Exchange, in retrospect, I amazingly find there are substantial bias impacts on my decision with respect to choosing, selling and keeping stocks.

framing comes from its ability to define the terms of a debate without the audience realizing it is taking place.” (Tankard, 2001, p. 96)

The effect of irrelevant information on decision making has been studied in the context of psychology (Gaeth and Shanteau 1984, Kahneman and Tversky 1973, Lu and Proctor 2001, Tversky and Kahneman 1974), education (Rice, 1975), accounting (Thaler and Johnson 1990), decision science (Sengupta 1995), and behavioral economics (Thaler 2016). For example, Kahneman and Tversky (1973) find that people respond differently to a probability question (e.g., whether someone is an engineer or a lawyer) when given no description than when given a description that conveys irrelevant information (e.g., this person is a 30-year-old man). Likewise, Tversky and Kahneman (1974) find that even a random number determined by a spinning wheel affects the estimates of unknown quantities. More recently, Thaler (2016) observes that there

As we have seen before, behavioural theory and neoclassical have different ontologies. Behavioural theory is multidisciplinary approach while the neoclassical one has purely economic perspectives. Moreover, the behavioural approach attempts to innovate in term of producing new theory. Kahneman and Tversky's “prospect theory” (1979, Prospect theory, an analysis of decision under risk) is a descriptive approach to model real-life choices and is considered as the keystone of the new research program.

Prospect theory is a Behavioural Economics Theory which tries to understand how people take decisions in terms of two alternatives, which have a probabilistic nature. These decision making processes and their respective outcomes also involve risk. An important point of the Prospect Theory is that it considers the fact that the outcomes of the alternatives are known. The basic idea behind the theory is that people base their decisions on potential gains and losses, rather than thinking about the final outcome. The theory is of the idea that people make such decisions about gains and losses with the help of heuristics. The theory has been very critical in its application as it tries to bring forth a model which is much more realistic in nature,

The concept of framing which is a part of prospect theory (Kahneman and Tversky 1979) is closely related to the formation of reference price in the consumer’s mind. Outcomes above the consumer’s reference point are presented as gains and it affects choice, judgment, and risk-taking differently than the same alternatives which are below the reference point and are coded as losses by the consumer.