Framing Effects in Consumer Choice

In the basic model of consumer behavior, the choices were described in the abstract: red pencils or blue pencils, hamburgers and french fries, and so on. However, in real life, people are strongly affected by how choices are presented to them or framed.

A faded pair of jeans in a thrift shop may be perceived very differently than the same jeans sold in an exclusive store. The decision to buy a stock may feel quite different than the decision to sell a stock, even if both transactions end up with the same portfolio. A store might sell dozens of copies of a book priced at $29.95, whereas the same book priced at $29.00 would have substantially fewer sales.

These are all examples of framing effects, and they are clearly a powerful force in choice behavior. Indeed, much of marketing practice is based on understanding and utilizing such biases in consumer choice.

The Disease Dilemma

Framing effects are particularly common in choices involving uncertainty. For example, consider the following decision problem:2

A serious disease threatens 600 people. You are offered a choice between two treatments, A and B, which will yield the following outcomes.

Treatment A. Saving 200 lives for sure.

Treatment B. A 1/3 chance of saving 600 lives and a 2/3 chance of saving no one.

Which would you choose? Now consider the choices between these treatments.

Treatment C. Having 400 people die for sure.

Treatment D. A 2/3 chance of 600 people dying and a 1/3 chance of no one dying.

Now which treatment would you choose?

2 A. Tversky and D. Kahneman, 1981, "The framing of decisions and the psychology of choice," Science, 211, 453-458.

In the positive framing comparison—which describes how many people will live—most individuals choose A over B, but in the negative framing comparison most people choose D over C even though the outcomes in A-C and B-D are exactly the same. Apparently, framing the question positively (in terms of lives saved) makes a treatment much more attractive than framing the choice negatively (in terms of lives lost).

Even expert decisions makers can fall into this trap. When psychologists tried this question on a group of physicians, 72 percent of them chose the safe treatment A over the risky treatment B. But when the question was framed negatively, only 22 percent chose the risky treatment C while 72 percent chose the safe treatment.

Though few of us are faced with life-or-death decisions, there are similar examples for more mundane choices, such as buying or selling stocks. A rational choice of an investment portfolio would, ideally, depend on an assessment of the possible outcomes of the investments rather than how one acquired those investments.

For example, suppose that you are given 100 shares of stock in Concrete-Blocks, com (whose slogan is "We give away the blocks, you pay for packing and shipping"). You might be reluctant to sell shares you received as a gift despite the fact that you would never consider buying them yourself.

People are often reluctant to sell losing stocks, thinking that they will "come back." Maybe they will, maybe they won't. But ultimately you shouldn't let history determine your investment portfolio—the right question to ask is whether you have the portfolio choices today that you want.

Anchoring Effects

The hypothetical ConcreteBlocks.com example described above is related to the so-called anchoring effect. The idea here is that people's choices can be influenced by completely spurious information. In a classic study the experimenter spun a wheel of fortune and pointed out the number that came up to a subject.3 The subject was then asked whether the number of African countries in the United Nations was greater or less than the number on the wheel of fortune.

After they responded, the subjects were asked for their best guess about how many African countries were in the United Nations. Even though the number shown on the wheel of fortune was obviously random, it exerted a significant influence on the subjects' reported guesses.

In a similar experimental design, MBA students were given an expensive bottle of wine and then asked if they would pay an amount for that bottle equal to the last two digits of their Social Security number. For example,

3 D. Kahneman and A. Tversky, 1974, "Judgment under uncertainty: Heuristics and biases," Science, 185: 1124-1131.

if the last two digits were 29, the question was "Would you pay $29 for this bottle of wine?"

After answering that question, the students were asked what the maximum amount is that they were willing to pay for the wine. Their answers to this latter question were strongly influenced by the price determined by the last two digits of their Social Security number. For example, those with Social Security digits of 50 or under were willing to pay $11.62 on average, while those with digits in the upper half of the distribution were willing to pay $19.95 on average.

Again, these choices seem like mere laboratory games. However, there are very serious economic decisions that can also be influenced by minor variations in the way the choice is framed.

Consider, for example, choices of pension plans.4

Some economists looked at data from three employers that offered automatic enrollment in 401 (k) plans. Employees could opt out, but they had to make an explicit choice to do so. The economists found that the participation rate in these programs with automatic enrollment was spectacularly high, with over 85 percent of workers accepting the default choice of enrolling in the 401(k) plans.

That's the good news. The bad news is that almost all of these workers also chose the default investment, typically a money market fund with very low returns and a low monthly contribution. Presumably, the employers made the default investment highly conservative to eliminate downside risk and possible employee lawsuits.

In subsequent work, these economists examined the experience at a company where there was no default choice of pension plan: within a month of starting work, employees were required to choose either to enroll in the 401 (k) plan or to postpone enrollment.

By eliminating the standard default choices of non-enrollment, and of enrollment in a fund that had low rates of return, this "active decision" approach raised participation rates from 35 percent to 70 percent for newly hired employees. Moreover, employees who enrolled in the 401 (k) plan overwhelmingly chose high savings rates.

As this example illustrates, careful design of human resources benefits programs can make a striking difference in which programs are chosen, potentially having a large effect on consumer savings behavior.

Bracketing

People often have trouble understanding their own behavior, finding it too difficult to predict what they will actually choose in different circumstances.

4 James Choi, David Laibson, Brigitte Madrian, and Andrew Metrick, "For Better or for Worse: Default Effects and 401 (k) Savings Behavior," NBER working paper,

W8651, 2001.

For example, a marketing professor gave students a choice of six different snacks that they could consume in each of three successive weeks during class.5 (You should be so lucky!) In one treatment, the students had to choose the snacks in advance; in the other treatment, they chose the snacks on each day then immediately consumed them.

When the students had to choose in advance, they chose a much more diverse set of snacks. In fact, 64 percent chose a different snack each week in this treatment compared to only 9 percent in the other group. When faced with making the choices all at once, people apparently preferred variety to exclusivity. But when it came down to actually choosing, they made the choice with which they were most comfortable. We are all creatures of habit, even in our choice of snacks.

Too Much Choice

Conventional theory argues that more choice is better. However, this claim ignores the costs of making choices. In affluent countries, consumers can easily become overwhelmed with choices, making it difficult for them to arrive at a decision.

In one experiment, two marketing researchers set up sampling booths for jam in a supermarket.6 One booth offered 24 flavors and one offered only 6. More people stopped at the larger display, but substantially more people actually bought jam at the smaller display More choice seemed to be attractive to shoppers, but the profusion of choices in the larger display appeared to make it more difficult for the shoppers to reach a decision.

Two experts in behavioral finance wondered whether the same problem with "excessive choice" showed up in investor decisions. They found that people who designed their own retirement portfolios tended to be just as happy with the average portfolio chosen by their co-workers as they were with their own choice. Having the flexibility to construct their own retirement portfolios didn't seem to make investors feel better off.7

Constructed Preferences

How are we to interpret these examples? Psychologists and behavioral economists argue that preferences are not a guide to choice; rather, preferences are "discovered" in part through the experiences of choice.

5 I. Simonson, 1990, "The effect of purchase quantity and timing on variety-seeking behavior/' Journal of Marketing Research, 17: 150-164.

6 Sheena S. Iyengar and Mark R. Lepper, "When choice is demotivating: can one desire too much of a good thing?" Journal of Personality and Social Psychology, 2000.

7 Shlomo Benartzi and Richard Thaler, "How Much Is Investor Autonomy Worth?"

UCLA working paper, 2001.

Imagine watching someone in the supermarket picking up a tomato, putting it down, then picking it up again. Do they want it or not? Is the price-quality combination offered acceptable? When you watch such behavior, you are seeing someone who is "on the margin" in terms of making the choice. They are, in the psychologists' interpretation, discovering their preferences.

Conventional theory treats preferences as preexisting. In this view, preferences explain behavior. Psychologists instead think of preferences as being constructed—people develop or create preferences through the act of choosing and consuming.

It seems likely that the psychological model is a better description of what actually happens. However, the two viewpoints are not entirely incompatible. As we have seen, once preferences have been discovered, albeit by some mysterious process, they tend to become built-in to choices. Choices, once made, tend to anchor decisions. If you tried to buy that tomato from that consumer once they have finally decided to choose it, you would likely have to pay more than it cost them.

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