What are common framing effects in business decision making?

1 Risk aversion and preference

One of the most well-known framing effects is the risk aversion and preference effect, which states that people tend to avoid risks when the outcomes are framed as gains, but seek risks when the outcomes are framed as losses. For example, suppose you have to choose between two options: A) receive $100 for sure, or B) have a 50% chance of receiving $200 and a 50% chance of receiving nothing. Most people would choose option A, because they prefer a certain gain over a risky one. However, if the options are framed differently, such as: C) lose $100 for sure, or D) have a 50% chance of losing $200 and a 50% chance of losing nothing, most people would choose option D, because they prefer a risky loss over a certain one. This effect can affect business decision making in situations such as investing, pricing, marketing, and hiring. To avoid this effect, you should try to reframe the options in terms of both gains and losses, and consider the expected value and the opportunity cost of each option.

2 Anchoring and adjustment

Another common framing effect is the anchoring and adjustment effect, which states that people tend to rely too much on the first piece of information they receive (the anchor) and adjust their judgments insufficiently from it. For example, suppose you are negotiating a salary with a potential employer, and they offer you $50,000. This offer becomes your anchor, and you may adjust your expectations and demands around it, even if it is too low or too high for your skills and experience. This effect can affect business decision making in situations such as budgeting, forecasting, valuation, and bidding. To avoid this effect, you should try to gather more information from different sources, set your own anchors based on your goals and criteria, and challenge the anchors that are presented to you.

3 Framing and emotion

A third common framing effect is the framing and emotion effect, which states that people tend to react differently to information depending on how it appeals to their emotions. For example, suppose you are selling a product that can reduce the risk of a disease by 50%. You can frame this benefit positively, such as: "This product can save your life by cutting the risk of disease in half", or negatively, such as: "This product can prevent you from dying by avoiding the risk of disease". Depending on your target audience and your objective, one frame may be more persuasive than the other. This effect can affect business decision making in situations such as advertising, branding, persuasion, and motivation. To avoid this effect, you should try to understand the emotional impact of your messages, use neutral and factual language, and balance positive and negative frames.

4 Framing and ethics

A fourth common framing effect is the framing and ethics effect, which states that people tend to judge the morality of actions differently depending on how they are framed. For example, suppose you are faced with a dilemma: you can either save one person from a burning building, or save five people from a collapsing bridge. You may feel more inclined to save the one person, because you can frame it as a positive act of saving a life, rather than a negative act of sacrificing five lives. However, if the dilemma is framed differently, such as: you can either let one person die in a burning building, or let five people die in a collapsing bridge, you may feel more inclined to save the five people, because you can frame it as a positive act of minimizing the loss of life, rather than a negative act of killing one person. This effect can affect business decision making in situations such as ethical dilemmas, social responsibility, and stakeholder management. To avoid this effect, you should try to consider the consequences and implications of your actions, use consistent and transparent principles, and consult with others.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?