Framing and Reality

Daniel Kahneman: Thinking, Fast and Slow - Chapter 34

 Emotional Framing

2006 FIFA World Cup - Italy vs France Italy won France Lost

Gamble
Would you accept a gamble that offers a 10% chance to win $95 and 90% chance to lose $5?
Would you pay 5$ to participate in a lottery that offers a 10% chance to win $100 and a 90%
chance to win nothing?
Losses evoke more negative feelings than costs

Play Ticket Example

Woman lost 2 $80 play tickets
Woman lost $160 cash to be used to buy them.
 Emotional Framing

The MPG Illusion

Change car from 12mpg to 14mpg
Change car from 30mpg to 40mpg
Who is saving more fuel for the same distance?

Organ donation:
Opt in - low contribution (Germany, Denmark)
Opt out- high contribution (Austria, Sweden)
Laziness of system 2. People prepared will tick the box, others won't put the effort and skip
the box.
 Emotional Framing

$20 Gain 40-60 Spin gamble.

$50 You keep $50 (40%)
OR
$30 Loss You lose everything (60%)
Analyzing the brain activity
People conforming to the frame, who chose to gain $20 (GAIN) or to gamble (LOSS) was being
directed by System 1. Brain activity was high in Amygdala, the brain region associated with
emotional arousal.
People who chose the sure thing despite the situation was LOSS, had conflicting inclination to
System 1 and hence was not choosing the natural option. Brain activity was high in the anterior
cingulate, the region which is the brain region associated with conflict and self-control
Activity was high in the front brain for people who were the rational subjects who were the least
susceptible to framing effects. They are often reality bound.
Preferences are frame bound not reality-bound
 Asian Disease Problem

Asian Disease Problem

U.S is preparing for the outbreak of an unusual Asian disease that will kill 600 people.
Two alternatives
Program A : 200 people will be saved.
Program B : One third probability that 600 people will be saved, and two third probability
that no one will be saved.

Majority chooses Program A

 Asian Disease Problem

Asian Disease Problem

U.S is preparing for the outbreak of an unusual Asian disease that will kill 600 people.
Two alternatives
Program A : 400 people will die.
Program B : One third probability that nobody will die, and two third probability that 600
people will die.

Majority chooses Program B

People can be swayed by superficial manipulation !
 Emotional Framing - Takeaways

Losses evokes more negative feelings than costs

Choices are not reality-bound as System 1 is not reality-bound.
People readily forgo a discount than pay a surcharge.
Economically equivalent but not emotionally equivalent.
Preferences are frame bound not reality-bound
The Isolation Effect
Michael Lewis: The Undoing Project - Chapter 10
 Emotional Framing - Takeaways

People's desire to avoid loss exceed their desire to secure gain.

1000$ 50-50 Gamble vs $500 sure gain will make people choose the sure one. On
reducing the amount to $370, they prefer Gamble. To accept Gamble, the amount
should be further reduced.
3 Raisins in the new theory
People responded to changes rather than absolute levels
People attached risk very differently when it involved losses than when it involved gains.
People did not respond to probability in a straightforward manner.
Eg: 90% chance of working out vs 10% chance of working out. 90% is slightly less than 90%,
and 10% becomes slightly more than 10%.
Peoples emotional response to extremely long odds led them to reverse their usual taste of risk (risk
seeking for long shot gain to risk averse for remote possibility of loss)
Eg: Lottery/Insurance
 Risk-Value Theory

Danny & Amos presented the new theory of decision making to Nobel-prize winning
economists
Kenneth Arrow asked after the presentation: What is a loss?
According to theory, gain is winding up above the reference point & loss is winding up below it.
In experiments, status quo is the reference point, but in reality its expectation.

Reference point is not a fixed number, its a psychological state

The risk-value theory evaluated a person in isolation.
 Richard Thaler Endowment Effect

People theoretically should be willing to pay the same amount of money to cure a disease which
has 1/1000 chance of dying and to get exposed to a virus which has 1/1000 chance of killing.
But practically, responses were magnitude apart.
Baseball tickets: free tickets vs paid
Ready to forgo match (free) but not (paid)
Against the concept of sunk cost
People attached some strange value to what they own.
Other considered economists considered these as mistakes done by people!
1976: Value Theory Prospect Theory