The Framing of Decisions and the Psychology of Choice

Introduction and Overview

• Tversky and Kahneman discuss the psychology behind decision-making and the influence of framing on choices.
• Focus on the concept of how decisions can change based on the way in which the options are presented.
• Highlight that preferences can be highly inconsistent when faced with equivalent choices framed differently.

Framing Effect

• Problem 1 vs. Problem 2:
• Problem 1: Framed as saving lives.
  • Program A: Save 200 lives (72% choice)
  • Program B: 1/3 chance to save 600 lives (28% choice)
  • Majority chose the certain option (risk averse).
• Problem 2: Framed as losses.
  • Program C: 400 deaths certain (22% choice)
  • Program D: 1/3 chance of no deaths and 2/3 chance of 600 deaths (78% choice)
  • Majority chose the riskier option (risk seeking).
• Common Pattern:
  • Risk aversion with gains vs. risk seeking with losses.
• The disparity in responses is due to framing, showing that preference is not absolute but context-dependent.

Expected Utility Model

• Decisions traditionally based on expected utility theory.
• Acknowledges human rationality but constant reversals challenge this model.
• Decision-makers aim for the highest expected utility by weighing options (utility * probability).

Descriptions and Axioms

• Rational decisions are expected to meet basic criteria of consistency and coherence.
• Fluctuations in perspective can significantly alter the relative desirability of outcomes.

Evaluation of Prospects

• Prospect Theory:
• Moves beyond expected utility by addressing inconsistencies detected in human choice behavior.
• Outcomes are evaluated in terms of perceived gains/losses from a neutral reference point.
• Features:
  • Value Function: Generally convex for losses and concave for gains, leading to asymmetric risk attitudes.
  • Higher sensitivity to losses compared to gains (loss aversion).

Weighting of Probabilities

• In expected utility, probabilities are simply weighted; however, in prospect theory:
• Outcomes are influenced not just by probability but by decision weights, leading to distortions of perceived likelihood.
• Nature of Decision Weights:
• Low probabilities are often overweighted; high probabilities underweighted.
• Each condition leads to decisions that diverge from classical utility expectations.

Examples of Decision Problems

• Problem 3:
• Comparing decisions for gains vs. losses demonstrates preference shifts based on context.
  • Assurance of a certain gain vs. risky gain illustrates risk aversion in gains.
• Problems 5-7: Demonstrate the certainty effect and pseudocertainty effect in decision-making.
  • Choices can differ based solely on whether outcomes were deemed certain or probable.

Framing of Contingencies and Outcomes

• Questions crafted to promote conditional evaluations often lead to different selections.
• The concept of pseudocertainty exposes discrepancies between perceived security versus actual probabilistic risk.

Psychological Accounting

• Evaluating options based on the minimal account affects decision-making.
• The framing around expenditures influences whether an additional purchase seems reasonable.
• Issues of embedding options within differing valuations or accounts can skew decision-making (i.e., why people behave differently based on previous costs).

Discussion and Implications

• Variations in framing can cause significant shifts in preference, highlighting that preferences are not solely grounded in rational evaluations.
• Decision-makers often perceive outcomes through limited frames leading to various biases and inconsistencies.
• Normative implications: Understanding these effects can guide better decision-making by adjusting how decisions are presented and evaluated.