Kahneman 1984 - Choices, values, and frames

Google Scholar Link

Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American psychologist, 39(4), 341.

Summary

Risk is defined as knowledge of outcomes, without knowing which outcome will occur. Risk aversion is “a preference for a sure outcome over a gamble that has higher or equal expectation.” Risk seeking is “the rejection of a sure thing in favor of a gamble of lower or equal expectation.” Citing their own prospect theory, the authors show that loss aversion contributes to risk aversion in a positive domain and risk seeking in a negative domain. The domain refers to the framing of an event. The framing of an event refers to the context in which a decision-maker situates an event. For example, getting a bonus of $3000 can be viewed as a good thing (in the positive domain), but it could also be viewed in a negative frame (“My bonus is only $3000! Kim got $5000!”). When facing a possible loss, people are more likely to seek safety (less likely to go double or nothing when you’re up quite a bit). When facing a possible gain, people are more likely to seek risk (more likely to go double or nothing when you’re down quite a bit). Depending on the framing, preferences can be reversed (though outcomes remain the same). This flies in the face of traditional economics and the traditional theory of consumer behavior.

Application

Another incredibly powerful heuristic that is rooted in comparison and contrast. Framing (perhaps through careful control of referents) can change a good situation to bad, or vice versa. Future research should look at the relationship between anchoring and framing – they seem to be artifacts of the same force (with the main difference being that anchoring seems to be solely qualitative).