The Framing effect is the nature of the options available-that often influences a cognitive-based experiment in which the decision made or option taken by individual is, whether the options presented are positive or negative semantics (Hughes, Thompson, and Trimble 34). In making decisions when presented with a positive frame, people always tend to avoid risks. However, if the frame presented would bea negative frame, the same person would seek risk (Kureshi and Sujo 1). In order to asses the essence of framing effect on individuals’ decision-making process, an experiment of two alternative decisions and a control variable was conducted. The experiment’s basis was on the Kahneman’s framing experiment, where the authors, Daniel Kahneman and Amos Tversky, argued that people will always give different responses to the same problem based on how the framing or wording of the problem.

In this experiment, five respondents who acted as potential buyers of a company’s stocks were randomly selected and asked to choose between two decisions, 1 or 2, each with two alternatives. InDecision1 alternative A, only two of the five the respondents would be able to earn an extra $1000 for every share invested in the company. In alternative B, on the other hand, there was one-third possibility that all of these five respondents would earn an extra $1000 and that two-thirds of them would be unlucky and would not get any extra income. In Decision 2, the respondents were told that if they took alternative A, approximately 3 of them would not receive any extra earning for their shares. However, if they took alternative B, there was a one-third probability everyone would receive extra earnings, and a two-thirds probability that all the five would lose their investments. In order to enhance the validity of the experiments and the results generated from the respondents’ decisions, another group was created, the control group, where these respondents were to invest without being informed of either of the two options available. That is, the respondents would choose either to invest or not to invest in the company based on their independent decisions without being influenced by the available experimental conditions A and B.

The experiment’s dependent variable was the decision made by the participants while the independent variables were the two different treatments available. It, therefore, means that it was the two alternatives that would influence the decision taken by the respondent. When designing the experiment, three key assumptions were made. First, that investors are like consumers and hence will always prefer purchasing only the shares that they perceive would result in maximum positive effect. Secondly, that the decision of each respondent to invest in the company by buying the firm’s shares would be influenced significantly by the existing conditions, the two alternatives. Lastly, the experiment was based on the idea that if neither of these two conditions were to be removed, the decision of the respondents would be influenced by other extraneous factors such as age, previous investment history of the respondent, and respondent’s economic status.

Presented with Decision 1, most of the respondents will chose option A, where they would have some degree of assuredness that they will be able to earn extra income unlike in option B where such assuredness is relatively low. Surprisingly, in Decision 2 where both of the two alternatives available were risky, the respondents opted to take the less risky option which is option B. However, if all the respondents were not informed of either of the two decisions and the associated alternatives of each decisions, the decision made by each respondent was influenced by extraneous factors. Hence, their decisions in the control group were divergent and inconsistent. In conclusion, the results of the above experiments prove that individuals have cognitive bias when processing information and making decision as argued by (Holt and Laury 1644). Therefore, people would always avoid risk when presented with a positive frame and seek risk when presented with a negative frame, hence resulting in the framing effect.

Works Cited

Holt, Charles and Susan Laury. “Risk aversion and incentive effects.” American economic review 92.5 (2002): 1644-1655.

Hughes, K., J. Thompson, and J. E. Trimble. “Investigating the framing effect in social and behavioral science research: Potential influences on behavior, cognition and emotion.” Soc Behav Res Pract Open J 1.1 (2016): 34-37.

Kureshi, Sonal, and Sujo Thomas. “Testing the influence of message framing, donation magnitude, and product category in a cause-related marketing context.” Journal of Marketing Communications (2018): 1-22.

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