The Impact of Framing Effects on Investment Decision-Making.
Framing effects can play a few tricks on the user. They might make things seem silly or gloss over crucial facts, and so make decisions that they later regret. In the case of confidential data or longer term commitments, such influencing power must be kept out of framing effects.
Positive Framing
Framing can impact your investment decision so dramatically. Information presented can lead to investor reactions that lead investors to make bad decisions in the financial interest of the investor. Framing can magnify underlying emotional states such as fear and greed, and traders may take more immediate trading action than they would long-term strategies which could be more yield-inducing.
This is particularly true of marketing and financial services, where a financial advisor might use various framing strategies to persuade investors to trade with them – such as the focus on returns rather than losses.
Investors need to think critically if they are going to get away with framing effects. Investors should research any report and thoroughly explore any hidden data to select investments that are in line with their financial objectives and keep their heads up and not act out of panic or naivety.
Negative Framing
It can help you influence individuals when you have to tell them something, e.g. Affliction of framing effects should be avoided by investors thinking of investments; try to do your own research before making a commitment, and remember that history is not a predictor of future performance; stay away from too good to be true investment possibilities and if it’s too good to be true, don’t believe it.
Subjects also favour what they think will yield good returns to those that yield comparable outcomes, even when the chances of success for both are the same. So investors are likely to prefer strategies that are “5% loss” to strategies that are “95% gain” despite the fact that they both have similar statistically equal opportunities.
It is possible to minimise one’s vulnerability to framing by paying attention to cognitive biases. It could mean going to trainings, or building bias recognition into curriculum.
Time Framing
Presentations of investment alternatives can affect risk-awareness. So, for example, advertising an investment strategy with “do not lose 5%” might lead people to invest less rather than with “make 95% gain,” which both achieve the same thing. Knowledge about the influence of frames on risk evaluation allows investors to make informed decisions that are compatible with their cash-flow requirements and tolerance for risk.
Framing is routine in advertising and financial media. Investing needs to be able to identify these strategies, so that it is no longer subject to emotion like fear or greed, but rather focus on the facts while devising methods that are immune from such externalities and thus yield sustainable investment returns.
Investors can develop thinking skills for making investment decisions, as a proactive counter to framing biases. That means confirming any information you are given and verifying the source so they make the right choices.
Themes Framing
Themes framing — This is the presentation of investment options to investors. The way that a particular investment is presented, via images or narratives can affect which investment decisions investors make; this could negatively impact the overall performance of the investment plan and possibly have negative trading results.
Negative framing usually involves volatility, losing money and failure at certain points. This kind of framing could cause loss aversion – a preoccupation with the risk of losing rather than with savouring any opportunity gained through equal rewards.
Investors can learn to identify when they are swayed by framing effects by asking questions about compelling information, so as to avoid being swept up in framing effects and drive more considered decision making consistent with financial objectives and risk-adjusted actions.
