Active Stocks
Thu Jun 20 2024 10:14:31
  1. Tata Steel share price
  2. 181.10 0.58%
  1. HDFC Bank share price
  2. 1,653.70 -0.26%
  1. ITC share price
  2. 424.35 0.15%
  1. Tata Motors share price
  2. 983.30 0.60%
  1. Power Grid Corporation Of India share price
  2. 323.05 -1.37%
Business News/ Money / Personal Finance/  Framing Effect: How it influences investment decisions? Here are 5 ways
BackBack

Framing Effect: How it influences investment decisions? Here are 5 ways

Framing effect is a psychology marketers use to increase the demand of a company’s stocks. In this article, we will understand the consequences of it.

Gender inclusion is both about social impact and business sense; but predominantly (according to IMF) investment in women strengthens economic development.Premium
Gender inclusion is both about social impact and business sense; but predominantly (according to IMF) investment in women strengthens economic development.

Imagine you went shopping and saw a dress with MRP Rs 2,000, but after discount it is available for only Rs 1,600. You bought that dress immediately. When you come back home and search for the same dress online, it is available for Rs 1,200. Feeling trapped, right?

In the same way, the information is framed in front of you that intrigues you for investing in the stocks. As an investor, you might fall into the trap and create a company's image as ‘good’ in mind. Investing by creating an image on the basis of first information might lead you to a loss-making investment. This is known as the framing effect.

To prevent yourself from making these types of mistakes, the only thing that needs to be done is make extra research before investing. To understand the consequences of framing effects, let’s start from the basics.

What are the framing effects in investing?

Framing effects in investing refer to the way in which investment decisions are influenced by the way information is presented to investors. Specifically, framing effects refer to the fact that people tend to make different decisions depending on how information is presented to them, even if the information is the same.

Framing effects can manifest in more subtle ways. For example, investors may be more likely to take risks when they are presented with gains in terms of percentages (e.g. "you could earn a 100% return!") than when gains are presented in absolute terms (e.g. "you could earn $10,000!").

Here's how framing effect impacting your investment decisions

Biases can lead to suboptimal investment decisions

Framing effects can introduce biases into investment decisions by emphasizing certain aspects of the decision-making process while ignoring others. For example, framing an investment as ‘high-risk’ can make investors more risk-averse, even if the actual risk is relatively low.

Emotional decision-making can cloud judgment

Framing effects can trigger emotional responses that can cloud judgment and lead to suboptimal investment decisions. For instance, framing a loss as a "missed opportunity" can cause investors to make impulsive decisions to try and recoup their losses, rather than taking a more measured and rational approach.

Overconfidence can lead to poor investment choices

Framing effects can also lead to overconfidence, which can cause investors to take on too much risk or make investments that are outside of their comfort zone. For example, framing an investment as ‘safe’ can lead investors to be overly confident in its prospects and ignore warning signs.

Failure to consider alternative options

Framing effects can also limit investors' ability to consider alternative investment options. When investors are presented with a particular framing, they may fail to consider other investment opportunities that might be more suitable for their needs.

Limited perspective can lead to missed opportunities

Finally, framing effects can also limit investors' perspective on the investment landscape. By focusing on a particular framing, investors may miss out on potentially lucrative opportunities in other areas or industries. This can result in missed opportunities for growth and diversification.

Conclusion

In order to make informed investment decisions, it is important for investors to be aware of framing effects and to critically evaluate information presented to them in different ways. However, it is not only about protecting your investment from psychological tricks companies are playing, it is also about how to understand your own psychology and make informed financial decisions that create wealth.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

 

 

 

learning-lessons-widget
How to make long-term investment more rewarding
View Full Image
How to make long-term investment more rewarding

3.6 Crore Indians visited in a single day choosing us as India's undisputed platform for General Election Results. Explore the latest updates here!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 28 Mar 2023, 03:54 PM IST
Next Story footLogo
Recommended For You