Your Money Or Your Life?
How the "framing effect" impacts our financial decisions
You walk into Walmart, and you see two cans of bug spray.
The first can says, “kills 99% of bugs.”
The second says, “leaves 1% of bugs alive.”
Odds are you will buy the first bottle because it emphasizes killing the bugs (the result you want), and the second emphasizes that a few bugs will survive.
That is the framing effect inaction, which describes how information is presented and has more impact on the decision-making process than the content.
Continue reading to learn:
How the framing effect causes us to take unnecessary risks
Why financial advisors don’t follow their own advice
How the insurance industry uses the framing effect against you
How you can use the framing effect to your advantage
Your money or your life
Past research has shown that due to the framing effect, people prefer a small but sure win to a probable—but not guaranteed—big win when it comes to gains, but the opposite is true when it comes to losses.
Most people would rather take a guaranteed $100 prize to an 80% chance of winning $200 and a 20% chance of winning nothing. But they would prefer an 80% chance of losing $200 with a 20% chance of losing nothing than a 100% chance of losing $100.
It’s irrational, but humans also suffer from loss aversion, so they will make irrational choices when a situation is framed in such a way that emphasizes the possibility of loss.
In a 1996 paper, researchers asked 320 University students about hypothetical situations where they would have to make decisions about saving lives and saving property.1
For example, they were told 600 people had contracted a fatal disease and that they were given enough medicine to save 200 lives. Alternatively, they could give a reduced amount of medicine to all 600 patients, and there would be a 1/3 chance they all lived and a 2/3 chance they all died.
They were given a similar situation about saving 600 properties from a hurricane; guarantee 200 properties are undamaged and 400 are destroyed or opt for a 1/3 chance all 600 properties make it with a 2/3 chance they are all destroyed.
In both scenarios, the safe choice is to save the 200 people/properties, and the risky choice is to roll the dice in an attempt to save everyone/every property but risk losing everything.
When it came to saving human lives, most people chose the risky option. They would rather have a 1/3 chance to save everyone (and a 2/3 chance of saving no one) than a guaranteed chance of saving 200 people.
When it came to saving property, most people took the safe choice and opted to save 200 properties and let 400 properties be destroyed.
Does making the risky choice with human life mean people don’t care about saving lives?
No.
It’s the opposite. Most people agreed that saving people was much more important than saving property, and they would rather take a risk in an attempt to save everyone than choose to let anyone die—even if it means a 66% chance all 600 patients died.
An important note is that in this experiment, people were making hypothetical decisions about other people’s lives and property. What happens if they make similar decisions about their own lives or investments?
A 1997 paper appropriately titled “Framing Effects and Arenas of Choice: Your Money or Your Life?” asked research participants about similar situations with a safe and risky option around their own lives and money.2 The results were the same—the majority of people made riskier choices with their lives than they did with their money.
If someone knows what you value most, it’s not hard for someone to frame a situation that preys upon your fear of losing that thing to nudge you into making overly risky decisions. In real life, this is an even bigger problem because scammers and bullshitters will not only use negative framing to nudge you towards a risky decision, but they will straight up lie.
Consider the lies told by Anti-Vaxxers and financial bull$hitters running investing scams. They will twist the truth, and report lies as facts to push you into overly risky decisions that will be detrimental to your health (not getting vaccinated) or your wealth (putting your money in a crypto Ponzi scheme.)