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The framing effect is a cognitive bias in which people decide between options based on whether the options are presented with positive or negative connotations. [1] Individuals have a tendency to make risk-avoidant choices when options are positively framed, while selecting more loss-avoidant options when presented with a negative frame.
The concept of framing is adopted in prospect theory, which is commonly used by mental accounting theorists as the value function in their analysis (Richard Thaler Included [12]). In Prospect Theory, the value function is concave for gains (implying an aversion to risk ), indicating decreasing marginal utility with accumulation of gain.
The framing effect is the tendency to draw different conclusions from the same information, depending on how that information is presented. Forms of the framing effect include: Contrast effect , the enhancement or reduction of a certain stimulus's perception when compared with a recently observed, contrasting object.
Experimental economics is the application of experimental methods, including statistical, econometric, and computational, [139] to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate ...
People generally prefer the absolute certainty inherent in a positive framing-effect, which offers an assurance of gains. When decision-options appear framed as a likely gain, risk-averse choices predominate. A shift toward risk-seeking behavior occurs when a decision-maker frames decisions in negative terms, or adopts a negative framing effect.
Framing and prospect theory has been applied to a diverse range of situations which appear inconsistent with standard economic rationality: the equity premium puzzle, the excess returns puzzle and long swings/PPP puzzle of exchange rates through the endogenous prospect theory of Imperfect Knowledge Economics, the status quo bias, various ...
Evidence from behavioral economics suggests that there are at least four specific psychological factors underlying the sunk cost effect: Framing effects, a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain. [37]
Biases that affect memory, [18] such as consistency bias (remembering one's past attitudes and behavior as more similar to one's present attitudes). Biases that reflect a subject's motivation , [ 19 ] for example, the desire for a positive self-image leading to egocentric bias and the avoidance of unpleasant cognitive dissonance .