April 30, 2016 by calminvestor | 0 comments Nicotine addicted monks and framing
You have probably heard this one about the two trappist monks. Monk 1 asked his abbot whether it would be alright to smoke while he prayed. Scandalized, the abbot says “Of Course Not! That borders on sacrilege!”
Monk 2 asked his abbot whether it would be alright to pray while he smoked. “Of Course” says the abbot, “God wants to hear from us at any time”
The way the same information is presented to us has an impact on how we process and react to it. This effect is called ‘Framing’.
Next time you pick up a pack of chips or a jar of yogurt with the proud label “80% fat-free”, pause for a moment and think how you’d react to it if it said “20% fat”.
And it’s not just the spur-of-the-moment decisions in the supermarket that are impacted by framing.
Consider two ways in which the effects of surgery as a cure for a certain type of cancer were explained to physicians. Amos Tversky, one of the seminal figures in developing the discipline of behavioral economics and cognitive bias, conducted this experiment.
One set of physicians was presented information in this fashion:
While another set of physicians was presented the information in this fashion:
Would you think it made a difference? If you were explained the treatment for yourself or a loved one using the two methods above, would you react differently?
The physicians did:
Of those presented the information in the first format (survival rates), 82% recommended the surgery
Of the physicians presented the information in the second format (mortality rates), 56% recommended the surgery
Turns out, framing matters. And this is just one of several ways our brains are susceptible to little errors in judgement. Framing and Investing
Both communicate roughly the same information, except the use of the words “global sell-off” and the accompanying image of worried looking brokers staring at their terminals in the first article, literally paints a grim picture while the the more sanguine wording of the second “profit booking” makes it seem like a natural occurrence in the market. Sure enough, the image in the second article is a neutral picture of the Bombay Stock Exchange building.
Ask yourself if you would feel and react differently to the two articles above, thus determining your actions. If yes, remind yourself of this:
