Chapter 5 Framing and the Reversal of Preferences
The Asian Disease Problem
Imagine that the U.S is preparing for the outbreak of an unusual Asian disease that is expected to kill 600
people. Two alternative programs to combat the disease have been proposed. Assume that the exact
scientific estimate of the consequences of the program are as follows.
Program A: if Program A is adopted, 200 people will be saved
Program B: if Program B is adopted, there is a one-third probability that 600 people will be saved and a
two-thirds probability that no people will be saved.
Which of the two programs would you favor?
Risk Averse people would select Program A
Big Positive Gamble
You can (a) receive $10 mil for sure (expected value = $10 mil) or (b) flip a coin and receive $22 mil for
heads but nothing for tails (expected value = $11 mil). An expected - value decision rule would require
you to pick (b).
What would you do?
Risk Averse
Lawsuit
You are being sued for 500k and estimate that you have a 50% chance of losing the case in court
(expected value = -$250k). However, the other side is willing to accept an out-of-court settlement of
$240k (expected value = -$240k). An expected - value decision rule would lead you to settle out of court.
Ignoring attorney’s fees, court costs, aggravation, and so on, would you (a) fight the case, or (b) settle
out of court? Risk seeking
The Asian Disease Problem
Imagine that the U.S is preparing for the outbreak of an unusual Asian disease that is expected to kill 600
people. Two alternative programs to combat the disease have been proposed. Assume that the exact
scientific estimate of the consequences of the program are as follows.
Program C: if Program C is adopted, 400 people will die
Program D: if Program D is adopted, there is a one-third probability that no one will die and a two-thirds
probability that 600 people will die.
Which of the programs would you favor?
Risk seeking / death is change from the lives saving/ framing
The power of framing a subtle change in the implicit reference point that is invoke when solving a
problem. Very subtle changes in a wording of a problem via framing can have a dramatic impact on
preferences.
, People tend to be risk averse in the domain of gains and risk seeking to the domain of loss.
Sell or Hold?
You were given 100 shares of stock in XYZ Corp. two years ago, when the value of the stock was $20 per
share. Unfortunately, the stock has dropped to $10 per share during the two years that you have held
the asset. The corporation is currently drilling for oil in an area that may turn out to be a big “hit”. On
the other hand, they may find nothing. Geological analysis suggests that if they hit, the stock is expected
to go back up to $20 per share. If the will is dry, however, the value of the stock will to $0 per share.
Do you want to sell your stock now for $10 per share?
Framing is more ambiguous and there can be seen as averse or risk taking depending on the person.
The way options are frame can play an important role impacting our decisions. Framing impact our
decisions in a variety of domains.
Preference Reversals
● Sub-optimal decision portfolios ● “Pseudocertainty” and our judgements
● Insurance
● Evaluations of transactions
● Ownership and framing
● Mental accounting
● Bonuses versus rebates
● Separate versus joint evaluation
Framing and the Irrationality of the Sum of Our Choices
Imagine that you face the following pair of concurrent decisions. First, examine both decisions, and then
indicate the options you prefer.
Decision A
Choose between:
a. A sure gain of $240
b. A 25% chance to gain $1,000 and a 75% chance to gain nothing
Decision B
Choose between:
a. A sure loss of $750
b. A 75% chance to loss $1,000 and a 25% chance to lose nothing
What do people choose?
Decision A
a. 85% chose this option (sure gain)
b. 15% choose this option (uncertain gain)
Decision B
a. 12% choose this option (sure loss)
b. 88% chose this option (uncertain loss)
Russian Roulette
Question 1
How much would you pay to remove the bullet and reduce the likelihood of death form ⅙ (17%) to 0%?
The Asian Disease Problem
Imagine that the U.S is preparing for the outbreak of an unusual Asian disease that is expected to kill 600
people. Two alternative programs to combat the disease have been proposed. Assume that the exact
scientific estimate of the consequences of the program are as follows.
Program A: if Program A is adopted, 200 people will be saved
Program B: if Program B is adopted, there is a one-third probability that 600 people will be saved and a
two-thirds probability that no people will be saved.
Which of the two programs would you favor?
Risk Averse people would select Program A
Big Positive Gamble
You can (a) receive $10 mil for sure (expected value = $10 mil) or (b) flip a coin and receive $22 mil for
heads but nothing for tails (expected value = $11 mil). An expected - value decision rule would require
you to pick (b).
What would you do?
Risk Averse
Lawsuit
You are being sued for 500k and estimate that you have a 50% chance of losing the case in court
(expected value = -$250k). However, the other side is willing to accept an out-of-court settlement of
$240k (expected value = -$240k). An expected - value decision rule would lead you to settle out of court.
Ignoring attorney’s fees, court costs, aggravation, and so on, would you (a) fight the case, or (b) settle
out of court? Risk seeking
The Asian Disease Problem
Imagine that the U.S is preparing for the outbreak of an unusual Asian disease that is expected to kill 600
people. Two alternative programs to combat the disease have been proposed. Assume that the exact
scientific estimate of the consequences of the program are as follows.
Program C: if Program C is adopted, 400 people will die
Program D: if Program D is adopted, there is a one-third probability that no one will die and a two-thirds
probability that 600 people will die.
Which of the programs would you favor?
Risk seeking / death is change from the lives saving/ framing
The power of framing a subtle change in the implicit reference point that is invoke when solving a
problem. Very subtle changes in a wording of a problem via framing can have a dramatic impact on
preferences.
, People tend to be risk averse in the domain of gains and risk seeking to the domain of loss.
Sell or Hold?
You were given 100 shares of stock in XYZ Corp. two years ago, when the value of the stock was $20 per
share. Unfortunately, the stock has dropped to $10 per share during the two years that you have held
the asset. The corporation is currently drilling for oil in an area that may turn out to be a big “hit”. On
the other hand, they may find nothing. Geological analysis suggests that if they hit, the stock is expected
to go back up to $20 per share. If the will is dry, however, the value of the stock will to $0 per share.
Do you want to sell your stock now for $10 per share?
Framing is more ambiguous and there can be seen as averse or risk taking depending on the person.
The way options are frame can play an important role impacting our decisions. Framing impact our
decisions in a variety of domains.
Preference Reversals
● Sub-optimal decision portfolios ● “Pseudocertainty” and our judgements
● Insurance
● Evaluations of transactions
● Ownership and framing
● Mental accounting
● Bonuses versus rebates
● Separate versus joint evaluation
Framing and the Irrationality of the Sum of Our Choices
Imagine that you face the following pair of concurrent decisions. First, examine both decisions, and then
indicate the options you prefer.
Decision A
Choose between:
a. A sure gain of $240
b. A 25% chance to gain $1,000 and a 75% chance to gain nothing
Decision B
Choose between:
a. A sure loss of $750
b. A 75% chance to loss $1,000 and a 25% chance to lose nothing
What do people choose?
Decision A
a. 85% chose this option (sure gain)
b. 15% choose this option (uncertain gain)
Decision B
a. 12% choose this option (sure loss)
b. 88% chose this option (uncertain loss)
Russian Roulette
Question 1
How much would you pay to remove the bullet and reduce the likelihood of death form ⅙ (17%) to 0%?
