La Cible

23 FEATURE ARTICLE Framing The evaluation frame used to make a decision is influenced by both the personal characteristics of the decision-maker and the way the problem, the options and the outcomes are formulated. As a financial planner, you need to be aware that the way you present recommendations has repercussions on the decision the client will make. In the May 2015 issue of La Cible, we explored the first step in the decision-making process, the editing phase. 3 You have to understand here that presenting mathematically equivalent choices in different ways can lead to completely different evaluations, particularly because the same outcome may be seen as a loss or a gain. The following example demonstrates how the presentation of a problem can influence perception. Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which 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 programs are as follows: First presentation of options and possible outcomes Number of respondents: 152 • If program A is adopted, 200 people will be saved (chosen by 72%) • If program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved (chosen by 28%) Which of the two programs would you favour? Second presentation of options and possible outcomes Number of respondents: 155 • If program C is adopted, 400 people will die (chosen by 22%) • If program D is chosen, there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die (chosen by 78%) Which of the two programs would you favour? 4 The two groups chose the opposite options even though, from a mathematical point of view, the results are identical. In the first presentation of options, program A is shown from a point of view of gain, while in the second presentation, program C, which is equivalent, is shown from the point of view of loss, and the inverse for programs B and D. Here you can see that moving from an impression of gain to an impression of loss made the decision- makers opt for risk, rather than the risk aversion that is revealed in the first presentation. The different ways of presenting a problem can lead to other anomalies in the editing process. For example, we know that factors that are shared by several options may be cancelled out in the decision-maker's mind, which may lead to different choices for options that are nevertheless mathematically equivalent. In fact, the editing process takes place when the brain detects the possibility of simplifying the information it receives. Likewise, the way of presenting a problem can also influence the mental account that the results will affect – that is, the point of reference – and it can do so differently for each person. That means it is essential to adjust your language for every client, because not everyone analyzes information in the same way, to the same depth or with the same level of knowledge. The order in which the information is presented can also have an influence, since the decision-maker generally places greater weight on information received first. Mental accounting and framing align nicely with prospect theory. Mental accounting explains how certain points of reference are established, as well as confirms the influence of loss aversion in decision-making. Framing influences both the account used to evaluate an option and the positive or negative angle that will colour the evaluation. Since the nature of a financial planner's work requires an overview of the client's financial situation, you are, by definition, navigating against your (and your client's) natural tendency to compartmentalize. 3 Unconscious information filtering and organization process. 4 Amos TVERSKY and Daniel KAHNEMAN, "The Framing of Decisions and the Psychology of Choice," Science, New Series, Vol. 211, No. 4481, January 30, 1981, p. 453 at 453.

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