I answered a series of questions that proved I’m an irrational decision maker. I got fooled by framing effects and you might too. I’m going to walk you through these five questions today so you can understand key decision-making principles. That way you won’t fall into the same traps I did. Let’s get into it!
These questions and experiments come directly from Daniel Kahneman’s book Thinking, Fast and Slow . I loved it. Try to make the following decisions as if they were a reality for you.
A: sure gain of $240
B: 25% chance to gain $1,000 and 75% chance to gain nothing
A large majority of people choose A, the sure gain, over B, the risk of gain. This is because when the potential gains of a decision are substantial, humans tend to be risk averse. They play it safe. Decision B works out economically to a $250 gain on average. If we were rational, we’d choose B. But emotionally, we lean towards A.
C: sure loss of $750
D: 75% chance to lose $1,000 and 25% chance to lose nothing
When the potential losses of a decision are substantial, humans tend to be risk seeking. They want to gamble. That’s why a large majority of people choose D, the risk of a loss, over C, the sure loss. This can be a dangerous mindset. It’s what causes many people to gamble away their fortunes at a casino in a matter of hours.
This concept is called Prospect theory. People tend to prefer the sure thing over the gamble when the outcomes are good. They tend to reject the sure thing and accept the gamble when the outcomes are bad. But here’s where it gets interesting.
Narrow vs Broad Framing
You likely made decision 1 and decision 2 independently. You used narrow framing to evaluate your choices. In the experiment Daniel Kahneman conducted, 73% of people chose answers A and D. They chose the sure gain and risked the loss. While only 3% of people chose answers B and C. The opposite. But what if we used a broad frame to answer decisions 1 and 2 together? Let’s use answers AD, the most popular choice combination, vs BC, the least popular. Those choices compute to this…
AD: 25% chance to win $240 and 75% chance to lose $760
BC: 25% chance to win $250 and 75% chance to lose $750
This one is obvious. BC is the clear winner. When utilizing a broader frame, it’s easier to make more rational decisions. It’s why you’d probably take a million dollars over a 50% chance at five million dollars. But if you knew that decision would occur ten times in a row, you’d take the ten gambles as your odds of winning increase. This makes sense. But we shouldn’t go through life using a narrow frame for each decision we make. We make a lot of decisions over our lifetime. It’d be a shame to forgo the large gains from consistently using a narrow frame.
But this is the question that blew my mind. This is the framing effect in combination with prospect theory. Pretend you’re the president of the world’s smallest country. That’d be cool. And being a moral president, you care for all your people. You love them. Therefore, you make decisions that are in the best interest of your 600 citizens. Unfortunately, a new wave of COVID is hitting your country. Variant BA.Delta-Gamma-529 is surging. Your director of medicine provides you with two programs to counter it. What program do you use for your country?
Program A1: 200 people will be saved
Program B1: 1/3 probability that 600 people will be saved and 2/3 probability that no people will be saved
Prospect theory would say you chose program A1. This is what most respondents chose. They chose the safe bet. Unfortunately, your medical director must scrap those programs. They won’t work. He has developed a second set of programs as a replacement for you. What program are you using on your tiny country now?
Program A2: 400 people will die
Program B2: 1/3 probability that nobody will die and 2/3 probability that 600 people will die
Prospect theory would say you chose program B2 this time. But go back and compare decision 4 and 5. Program A1 and A2 are identical. Program B1 and B2 are identical. Despite being presented with the same decision, you chose to save 200 people the first time but risked 400 deaths the second time. Now that you know these choices were inconsistent, how do you decide? If you’re like me, you’re dumbfounded. The framing of the questions determined my decisions without me consciously knowing it. I’m making inconsistent decisions and I don’t know how to reconcile it. There’s no right answer here. But this is the point: “Most of us passively accept decision problems as they are framed and therefore rarely have an opportunity to discover the extent to which our preferences are frame-bound rather than reality-bound.”