Behavioral Finance and Your Portfolio

11Information Processing Bias #3: Framing Bias

You better cut the pizza in four pieces, because I'm not hungry enough to eat six.

—Yogi Berra

Bias Description

Bias Name: Framing bias

Bias Type: Cognitive

Subtype: Information processing

General Description

Framing bias notes the tendency of decision makers to respond to various situations differently based on the context in which a choice is presented (framed). This can happen in a number of contexts, including how word problems are described, how data is presented in tables and charts, and how figures are illustrated. For example, take a look at Figure 11.1. Which line is longer?

People subject to visual framing bias experience an optical illusion, which leads them to insist that the line on the bottom is longer. The graphic is reproduced, however, in Figure 11.2, this time with vertical marks added in as a guide. Which line is longer?

Figure 11.1 Which Line Is Longer?

Figure 11.2 Which Line Is Longer?

With the framing effect of the “arrow” detail neutralized, it becomes clear that the line on the top and the line on the bottom are equal in length.

In the context of everyday evidence of framing bias, we can look at how retailers price their products. Many grocers, for example, will price items in multiples: “2 ...