Framing Effect
The tendency for a decision to change depending on how the identical information is presented.
How it is identified
Test: preferences reverse when the same outcome is described as a gain rather than as a loss, or in different units
Unit
qualitative
In depth
Framing is exploited constantly in financial marketing: a fund advertised on its best three-year period, a return quoted absolutely rather than annualised, a fee quoted as a percentage rather than in rupees. The same investment can be made to look attractive or alarming without any number being false. Prospect theory explains why the gain frame and the loss frame produce different choices, since the reference point determines which side of the value function applies. The countermeasure is to restate everything in one consistent frame — rupees, annualised, after costs and after tax — before comparing anything.
Worked example
A fund advertises a 165% five-year return, which is 21.5% a year. Quoted as an annual figure against an index that returned 19.2%, the outperformance is 2.3 points rather than the impression the larger number creates.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Framing Effect” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.