Shlomo Benartzi, a professor at UCLA’s Anderson School of Management, recently wrote a piece for the European edition of The Wall Street Journal that explained a phenomenon called “narrow framing,” which often prevents investors from attaining success.
Benartzi explains that narrow framing occurs when people make investment decisions without being able to see the big picture. He describes narrow framing as “a tendency to see investments without considering the context of the overall portfolio.”
In order to deduce if people were vulnerable to narrow framing, Benartzi posed a gambling question: “Would you accept a bet in which you win $200 if the coin lands on heads and lose $100 if it lands on tails?” Many people will turn down this offer, even when offered to place the bet twice, which significantly increases odds of earning money.
With one of his colleague’s, Richard Thaler, Benartzi asked coffee shop patrons about a similar bet. Most patrons did not accept the initial coin flip offer, and found the prospect of placing the bet twice even less appealing. The percentage of subjects accepting the wager dropped by nearly a quarter.
The researchers then framed the question to patrons differently: “You have a 25 percent chance of winning $400, a 50 percent chance of winning $100 and a 25 percent chance of losing $200. Would you accept this bet?”
With this explanation of the odds of the same bet, acceptance rates went up by 50 percent. This speaks to narrow framing, as many patrons were considering each coin flip individually, rather than examining the overall odds of winning money. Benartzi explains that the best way to achieve long-term goals is to avoid getting fixated on short-term losses and achieve a balance in educated risk-taking.
Benartzi is a behavioral economist, who has done a multitude of research on helping people foster sound decision making skills. His book, The Smarter Screen, is a guide to promoting smarter online choices.