A Quick Review Of Framing Effect Studies

Amir Mohammad Tahamtan

Outline• A Brief review of Economic Choice Modelling

• Expected Utility Theory• Prospect Theory

• Selected Studies Of Framing Effect in• Game Theory• WTP/WTA• Law and economics• Insurance behavior• Health behavior• International Trade

Expected utility theory

Prospect theory

• The value of a risky prospect is calculated as follows:• ∏(p)*v(x) + ∏(q)*v(y)

outcome probability

x p

y q

Status quo 1-p-q

Properties of the value function v(.)• is commonly S-shaped, concave above the reference point and convex

below it• the response to losses is more extreme than the response to gains• Consider, for example, the Asian disease problem

The Example Of “Asian Disease Outbreak”

• Problem 1 :Program A: 200 people will be saved; (72%)Program B: 1/3 probability 600 people will be saved and 2/3 will be saved; (28%)• Problem 2:Program C: 400 people will die; (22%)Program D: 1/3 probability nobody will die and 2/3 probability 600 people will die; (78%)

The value function of the above example

Properties of the ∏(.)• ∏(0) = 0• ∏(1) = 1; but the function is not well-behaved near the endpoints• low probabilities are overweighted, moderate and high probabilities

are underweighted;• ∏(pq)/ ∏(p) < ∏(pqr)/ ∏(pr); for 0<p,q,r≤1

Framing effect in game theory• Anomalies: Ultimatums, Dictators and Manners, Camerer, Colin and Thaler, Richard H., Journal of

Economic Perspective, 1995;• Developments in non-expected utility theory: the hunt for a descriptive theory of choice under risk,

Starmer, Chris, Journal of economic literature; 2000• The effects of framing and negotiator overconfidece on bargaining behaviors and outcomes, Neale,

Margaret, Bazerman, Max, Academy of management journal, 1985;• Comparing students to workers: the effects of social framing on behavior in distribution games,

Carpenter, Jeffrey P., Burks, Stephen, Verhoogen, Eric, 2005;• Cognition and framing in sequential bargaining for gains and losses, Camerer, Colin, Johnson, Eric J., • Warm-Glow Versus Cold-Prickle: The Effects of Positive and Negative Framing on Cooperation in

Experiments, Andreoni, James, Oxford journal, 1995;• Warm-glow versus cold-prickle: a further experimental study of framing effects on free-riding, Park,

Eun-Soo, 2000

Cognition and framing in sequential bargaining for gains and losses• Studies have found systematic deviations between the offers people make and

perfect equilibrium offers derived from backward induction • In previous experiments, subjects actually offer the second player something

between the $1.25 equilibrium and $2.50, an equal split of the initial pie. Mean offers are around $2.00. Lower offers, including equilibrium offers of $1.25, are often rejected

Cognition and framing in sequential bargaining for gains and losses• Two players bargain by making a finite number of alternating offers;

Three-round game with a pie of $5.00 and a 50-percent discount factor

• Subjects began with $5 for each round. Then the players bargained over division of a loss of $5.00 in the first round, a loss of $7.50 in the second round, and a loss of $8.75 in the third round

• Results: the average offer was $2.22, i.e. player 1 offered player 2 a loss of -$2.78. low offers were very frequently rejected.

The Effects of Positive and Negative Framing on Cooperation in Experiments• The lack of free riding in experiments presents an especially

interesting challenge for economists• Free riding is a dominant-strategy Nash equilibrium• Saying that an investment in the public good will make others better

off is equivalent to stating that an investment in the private good will make others worse off

• ∏i= xi +1/2gi +1/2, s.t. gi + xi = 60 : making others better off• ∏i= xi +1/2gi +1/2 = xi +1/2gi-1/2: making others worse off

The Effects of Positive and Negative Framing on Cooperation in Experiments• Positive frame condition: cooperation starts 47% and decay to 21%,

overall contribution 34%.• Negative frame condition: cooperation starts 27% and decay to 1%,

overall contribution 16.2%.

Warm-glow vs cold prickle: further study• There is a significant difference between the two framing conditions

in terms of overall contribution rates, there is no significant difference for some subjects.

• The data strongly suggest that the negative framing has a most salient effect on the subjects who have individualistic value orientation, whereas the negative framing has a rather insignificant effect on the subjects who have cooperative value orientation.

The effects of framing on bargaining behaviors and outcomes

• Negotiation often is viewed in terms of what players have to lose

• Consider, for example, labor-management bargaining over wage

• Following the prospect theory’s proposition, they will respond in a risk-seeking manner and are likely to choose arbitration

The effects of framing on bargaining behaviors and outcomes• The negatively-framed condition:Any concessions beyond those granted will represent serious financial losses to the company. Please remember that your primary objective is to minimize such losses

to the company…

• The positively-framed condition:Any union concession from their current position will result in gains for the

company. Please remember that your primary objective is to maximize such losses to the company…

Results

Comparing students to workers• Verbal cues are not the only factor that shapes subjects’ beliefs;

Subjects’ beliefs are also influenced by the real-life social context.• The Ultimatum Game and the Dictator Game are conducted among

Middlebury college and people in a publishing distribution warehouse in Kansas city.

• To control for the demographic characteristics of the participant populations, a third round of the experiment was run in which the participant are the students of a junior college near the warehouse.

Results• Both groups of students exhibit a large drop in mean allocations

between the UG and DG experiments, while the workers offer the same amount, on average, in both games.

• Explanation: Workers see each other every day. However, students are more likely to be in competition for grades,

Selected Studies in Health WTP/WTA• A Review of WTA/WTP Studies, Horowitz, John K. and McConnell, Kenneth

E., 1999,• Are Experimental Economists Prone to Framing Effects?, Gächter, Simon et,al.,

2008, • The Influence of Framing on Willingness to Pay: An Explanation for the

Uncertainty Effect, Yang, Yang,, Loewenstein, George,

Are Experimental Economists Prone To Framing Effect?• The participants were junior and senior experimental scientists

(mostly economists) who registered for the 2006 Economic Science Association (ESA) meeting in Nottingham, UK

• The experimental framing manipulation concerned the fee for late/early registration.

Are Experimental Economists Prone To Framing Effect?• “We take this opportunity to remind you that the discounted

conference fee for early registration is available until 10 July 2006.”• “We take this opportunity to remind you that the conference fee will

include penalty for late registration after 10 July 2006.”

Are Experimental Economists Prone To Framing Effect?

Are Experimental Economists Prone To Framing Effect?

The Influence Of Framing On WTP• The concept of “Uncertainty Effect” or UE;• A Risky Prospect Is Valued Less Than Its Worst Possible Outcome• The average WTP of $26 for a $50 gift certificate for Barnes and

Noble, but only $16 for a lottery of winning $50 or $100 with equal probability.

The Influence Of Framing On WTP• Why does the UE occur when people value lotteries, but

not when they value equivalent uncertain outcomes in the form of consumer promotions or uncertain gift certificates?

• Framing a prospect as a “lottery ticket”, “raffle”, “gamble”, or “coin flip” dramatically reduces WTP as opposed to framing it as an “uncertain gift certificate” or “voucher”.

The Influence Of Framing On WTP• What Causes WTP To Be Lower Under The Lottery, Coin Flip, Raffle, And Gamble

Frame? • Subjective Uncertainty• Processing Disfluency• Negative Attitudes Towards Lotteries• Differences In Aleatory Uncertainty Or Mental Representations Of Uncertainty• Anticipated Disappointment• Anchoring• Associations With The Concept Gambling• Beliefs About What Others Would Be Willing To Pay Under These Frames.

The Influence Of Framing On WTP• Framing affects only WTP but not WTA• The only explanation that is consistent across all twelve experiments

is that these frames evoke lower reference prices.

Selected Studies in law and Economics• Experimental Law and economics, Colin, Camerer and Talley, Eric, 2004;• Expressive law: framing or equilibrium selection, Bohnet, Iris and Cooter, Robert,

2001;• Framing the Jury: Cognitive perspectives on pain and suffering awards,

McCaffery, Edward and Kahneman, Daniel, Virginia Law review, 1995

Expressive law: framing or equilibrium selection• Law’s largest effects come from coordination• Normative systems have multiple equilibria, so announcing a new law

can change expectations and cause behavior to jump from one equilibrium to another

• Prison dilemma was run in which choosing defection results in penalty 10% of the time

• The power of the penalty to coordinate increased as the proportion of actors decreased whose cooperation was needed to tip the system to a Pareto superior equilibrium

Selected readings in insurance behavior • Framing, Probability distortions, and insurance decisions, Johnson, Eric,

Hershely, John, Journal of risk and uncertainty, 1993

Framing, Probability distortions, and insurance decisions• Eisner and Strotz (1961) argue that people pay far more for flight insurance than

they should• Kunreuther et al. (1978) have demonstrated that people do not buy flood insurance

even when it is greatly subsidized and priced far below its actuarially fair value

• There are three component of insurance decision: • the risk itself• the policy premium• the benefit

Selected readings in health behavior• Framing of decisions and selection of alternatives in health care, Wilson, Dawn, Kaplan, Robert, social behavior,

1987• Fuzzy-trace Theory and Framing Effects in choice: Gist Extraction, Truncation, and conversion, Journal of

behavioral decision making, 1991;• Is there something more important behind framing? Li, Shu and Adams, Austin, organizational behavior and

human decision process, 1995• Risky decision making and allocation of resources for leukemia and AIDS programs, Levin, Irwin and Chapman,

Daniel, health psychology, 1993;• Shaping perceptions to motivate healthy behavior: the role of message framing, Rothman, Alexander, Salovey,

Peter, Psychological bulletin,1997• The effect of message framing on breast self-examination attitudes, intentions, and behavior, Meyerowitz, Beth,

Journal of personality and social psychology, 1987• The effects of message framing on mammography utilization, Banks, Sara, health psychology, 1995• The influence of message framing on intentions to perform health behaviors, Rothman, Alexander, journal of

experimental social psychology, 1993

Framing effect and health behavior

Public health decisions

AIDSNuclear

accidents

Cancer

Natural gas explosionss

Personal health decisions

Whether to undergo surgery

Breast self-examination

Selected studies in international trade• Through a glass and a darkly: Attitudes Toward International Trade and the

Curious Effects of Issue Framing, Hiscox, Michael J., 2004

Attitudes Toward International Trade and the Curious Effects of Issue Framing

The Framing of Decisions and the Psychology of Choice• The Framing Of Acts• The Framing Of Contingencies• The Framing Of Outcomes

The Framing Of Acts• Problem 3:Imagine that you face the following pair of concurrent decisionsDecision I: A. a sure gain of $240; (84%)B. 25% chance to gain $1000 and 75% to gain nothing; (16%)Decision II:C. a sure loss of $750; (13%)D. 75% chance to lose $1000 and 25% to lose nothing; (87%) N = 150

The Framing Of Acts• Problem 4• Choose between:A&D: 25% chance to win $240 and 75% to lose $750;(0%)B&C: 25% chance to win $250 and 75% to lose $750;(100%)N = 86

The framing of contingencies• Problem 5Which of the following option do you prefer?I) A sure loss of $30;(78%)II) 80% chance to win $45;(22%)

The framing of contingencies• Problem 6 [N = 85]:• Consider the following two stage game. In the first stage, there is a

75% chance to end the game without winning anything, and a 25% chance to move into the second stage. If you reach the second stage, you have a choice between:

• C. a sure win of $30 [74 percent]• D. 8% chance to win $45 [26 percent]• Your choice must be made before the game starts, i.e., before the

outcome of the first stage is known. Please indicate the option you prefer?

The framing of contingencies• Problem 7 [N = 81]:• Which of the following options do you prefer? • E. 25% chance to win $30 [42 percent] • P. 2Wh chance to win $45 [58 percent]

Comparison of problem5, 6, and 7 • Problem 6 and 7 are identical;• Problem 6 differs from problem 5 only by the introduction of a

preliminary stage;• Problem 5 and 7 are also identical;• The participants, however, responded similarly to problems 5 and 6

but differently to problem 7;• The Certainty Effect and the Pseudo Certainty Effect

The Framing Of Outcomes• Outcomes are commonly perceived as positive or negative in relation to a reference

outcome that is judged neutral.• Variations of the reference point can therefore determine whether a given outcome is

evaluated as a gain or as a loss. • We propose that people generally evaluate acts in terms of a minimal account, which includes

only the direct consequences of the act.

The Framing Of Outcomes• Problem 8 [N = 183]: • Imagine that you have decided to see a play where admission is $10

per ticket. As you enter the theater, you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?

• Yes [88 percent] No [12 percent]

The Framing Of Outcomes• Problem 9 [N = 200]:• Imagine that you have decided to see a play and paid the admission

price of $10 per ticket. As you enter the theater, you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?

• Yes [46 percent] No [54 percent]