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The Framing of Decisions and the Psychology of Choice by Tversky and Kahneman

The Framing of Decisions and the Psychology of Choice by Tversky and Kahneman. Published in Science 211, January 1981. Framing … background.

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The Framing of Decisions and the Psychology of Choice by Tversky and Kahneman

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  1. The Framing of Decisions and the Psychology of Choice by Tversky and Kahneman Published in Science 211, January 1981

  2. Framing … background Tversky and Kahneman demonstrate that the psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference (reversals of preference) when the same problem is framed in different ways. The dependence of preferences on the formulation of decision problems is a significant concern for the theory of rational choice.

  3. Framing: definition Decision frame = Decision-maker’s conception of the acts, outcomes, and contingencies associated with a particular choice The frame that a decision maker adopts is controlled partly by the formulation of the problem and partly by the norms, habits and characteristics of the decision maker It is often possible to frame a problem in more than one way; frames may be compared to alternative perspectives on a visual scene: the perceived relative height of two neighboring mountains should not reverse with changes of vantage point

  4. Illustrative example We are preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to fight the disease have been proposed. If program A is adopted, 200 people will be saved. If program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. Which of the two programs would you favor?

  5. Illustrative example continued Another version of the same problem: If program C is adopted, 400 people will die. If program D is adopted, there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die. Which of the two programs would you favor? Discuss the choices! Explain!

  6. Reversals of preference caused by: • The framing of acts • Change of reference point • The framing of contingencies Prospect theory can explain the framing effect

  7. The framing of acts Examine the following decisions: Choose between • Sure gain of 240 • 25% chance to win 1000, and 75% chance to win nothing Choose between C. A sure loss of 750 D. 75% chance to lose 1000, and 25% chance to lose nothing

  8. The framing of acts continued In Tversky-Kahneman experiments the majority choice is A and D: in problem 1 risk averse, in problem 2 risk prone Explanation: prospect theory value functions (underweighting of moderate and high probabilities contributes additionally to the relative attractiveness of the sure gain in problem 1 and to the relative aversiveness of the sure loss in problem 2)

  9. Role of reference point Outcomes are commonly perceived as positive or negative in relation to a (neutral) reference outcome: Consider a person who has spent an afternoon at the race track, has already lost 140$ and is considering a 10$ bet on a 15:1 long shot in the last race. The decision can be framed in two ways, corresponding to two natural reference points: • Gain of 140$ and a loss of 10$ (last bet) • Zero loss and a loss of 150$ (for the betting day) According to prospect theory, the latter (more common) frame will produce more risk seeking than the former frame.

  10. Role of reference point continued Note 1: A reference point is usually a state to which one has adapted. Note 2: Because losses loom larger than gains, consumers are less willing to accept a surcharge than to forego a discount. An example: Theater ticket costs 10$. Upon entering the theatre you discover that you have lost a 10$ bill. Would you still buy the theater ticket? You have pre-purchased a 10$ theater ticket. Upon entering the theater you discover that you have lost the ticket (it cannot be recovered). Would you buy another ticket and pay 10$ for it? (mental accounting)

  11. The framing of contingencies Consider the following three problems from T-K: Problem 5: • A sure win of 30 (78%) • 80% chance to win 45 (22%) Problem 6: Consider the following 2-stage game. In the first stage, there is a 75% chance to end the game without winning anything, and a 25% chance to move into the second stage. In the second stage you have a choice between: C. A sure win of 30 (74%) D. 80% chance to win 45 (26%) Your choice must be made before the outcome of the first stage is known.

  12. The framing of contingencies Problem 7: E. 25% chance to win 30 (42%) F. 20% chance to win 45 (58%) Examine the structure of the problems! Problems 6 and 7 are identical in terms of probabilities and outcomes! Consistency requires the same choice to be made! Problem 6 differs from problem 5 only by the introduction of a preliminary stage. If the second stage is reached, problem 6 reduces to problem 5!

  13. The framing of contingencies continued By a logical analysis, problem 6 is equivalent to problem 7 and problem 5. The subjects responded similarly to problems 5 and 6 but not to 7! Tversky and Kahneman explain that the patterns of responses exhibit two phenomena: (1) the certainty effect and (2) the pseudo-certainty effect The comparison of problems 5 and 7 reveals what we have called the certainty effect (discovered by Allais). Prospect theory attributes this effect to the properties of the weight function п (reduction of the probability of an outcomeby a constantfactorhasmoreimpactwhen the outcomewasinitiallycertainthanwhenitwasmerelyprobable)

  14. The framing of contingencies continued The discrepancy between the responses to problems 6 and 7 could be described as a pseudo-certainty effect. The prospect yielding 30 is relatively more attractive in problem 6 than problem 7, as if it had the advantage of certainty. The sense of certainty is, however, illusory!! Note: pseudo-certainty can be induced either by a sequential formulation (problem 6) or by the introduction of causal contingencies: ”risk to life existed only in the event (probability 10%) that the disease was carried by a particular virus”

  15. Conclusions According to Tversky and Kahneman: • Individuals who face a decision problem might have a different preference when a different framing of the same problem is used • Individuals are normally unaware of alternative frames and their possible effects on the relative attractiveness of decisions • Would wish their preferences to be independent of framing • Are often uncertain how to resolve detected inconsistencies • Phenomena observed can be explained with prospect theory

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