The framing bias is very effectively explained by behavioural economics guru Rolf Dobelli in the video. How we react is heavily influenced on how information is presented to us, in a positive or negative light. If our options are presented with positive or negative connotations; e.g. as a loss or as a gain, we tend to avoid risk when a positive frame is presented but seek risks when a negative frame is presented.
The classic examples of this are found in advertising – you will never read an advert that says 10% of our customers are not satisfied as this seems a much worse outcome than 90% of customers are satisfied. A good trick is to use this inversion technique - switch around the information from the way it is presented and see if it sounds as attractive.
The best way to manage this in an investment context is to stay rational, to use probabilities when making decisions and to always focus on risk vs return. This is true of most biases. A particular technique to avoid being impacted by framing is to regard company results with a degree of scepticism.
To give an example, a fast growing company sees eps rise to $2.50 in Q2. EPS was $2.00 in Q1, but expectations were for $2.75 in Q2. The company presentation will be EPS up 25%, but the more important measure will be the shortfall vs expectations.
Rolf Dobelli was introduced in the video – the most comprehensive book on biases is The Art of Thinking Clearly and this is a great accompaniment to Kahneman’s Thinking Fast and Slow. You can get it on Amazon.com or Amazon.co.uk with our affiliate link.