Your day-to-day life is full of decisions. They range from the moment you wake up until the moment you go to sleep: what to have for breakfast, what shoes to wear to work, what TV series to watch, where to meet your friends and so on. However, there are also other types of decisions that, even though they are also made every day, deserve a little more of your attention, such as those related to your personal finances.

Classic economic theories suggested, in the past, that people make financial decisions in a rational way, based on judgment and reason. However, this approach has changed with the advent of behavioural economics. This understanding of economics shows how social, psychological or emotional aspects influence decision-making. And they do so without you even realising. This is what is known as financial bias.

It’s likely that you may have chosen to purchase one service or product over another that could be the same, or even better, simply because of the way it is presented to you. These types of decisions are made due to what is known as the framing effect. They are more frequent than you might think. This effect is the reason why, in general, you are more influenced by the presentation – the framing – of the product or service than by more relevant aspects such as price, features or durability when it comes to choosing what to buy.

This effect does not only refer to packaging or aesthetics.  It also takes into account the way in which positive information is highlighted – framed – versus negative information, the order in which the information is presented or worded, or the context used, among other variables that condition the consumer’s final decision. Amos Tversky and Daniel Kahneman, are the psychologists who discovered and studied the framing effect.

How does the framing effect influence your personal finances?

Let’s imagine that Isabel wants to buy a perfume. At the shop, she finds the fragrance she always wears, but this time it’s available in two different formats. The first option holds 100 ml, its bottle is large and has flashy, modern style features and it is discounted by 10% for a few days, so its final cost is €60. The second option, on the other hand, with 150 ml capacity but the bottle seems smaller and features a more simple design. In addition, it’s not discounted and its price is €70.

Which option do you think Isabel will choose? Using maths, it’s easy to see that with if she bought the second option, she could get 50% more perfume for only €10 more. However, the framing effect ensures that the size of the bottle, its decoration and the information about the limited-time discount are definitive aspects that led her to purchase the first option.

The example above is just one of the ways the framing effect manifests itself. There are also cases in which the information offered is used as a key element to get a person to choose one option over another. Let’s take Thomas, for example, who wants to get internet for his home. There are two different companies that offer the same service, but present their product information differently. Company A guarantees that 90% of the time the internet speed will be optimal, while company B warns that 10% of the time the signal may not be the best. In reality, the two concepts are exactly the same, but one company presents the information in a positive message while the other presents it negatively. For that reason, Thomas chooses the first option.

How can you combat the framing effect?

The first step to not be fooled by appearances when making a decision is knowing how the framing effect works. Once you understand it and are able to identify it, all you need to do is bear in mind a few tips:

Before purchasing a product or service, you need to compare the different options available, as well as the features of each one. Take into account the positive information presented to you, but try to identify the less advantageous aspects so that you can compare them and assess which has a greater weight in your decision.

As this bias uses aspects such as emotions or perceptions to influence your purchasing decisions, try to find the most relevant information that is directly related to the use and usefulness of the product or service you are going to purchase. It’s all about making an impartial assessment.

Your brain makes many of your decisions automatically, based on your opinions, experience and memories, among other factors. That’s why you need to invest time and analyse your different purchase options. Ask yourself questions, search for information, check the data, compare reviews etc. Cognitive biases will fool you into making irrational decisions. Another example of this is the “bandwagon” effect. 

When you learn to identify the framing effect and take the necessary measures to avoid it when deciding what to purchase will help you make more informed choices. In this way you will optimise your resources, consume more intelligently and be safe from the biases that encourage you to decide what to purchase.

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