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It’s All In The Framing

A simple wording difference in a question can make the difference in the decisions we make.  This is one of the key concepts of the book Nudge, a great treaty on behavior economics.  So how can you structure your situation and your choices to improve your results?  What Framing works best?

This Post All Started with a Book

Nudge is a very good book, and I recommend you read the whole thing.  It’s by Professors Thaler and Sunstein.  Who are these gentleman you ask?  Well Richard Thaler won a noble prize in economics largely for hist theories on concepts similar to ones in this book.  The writing focuses on behavioral economics and specifically framing choices to make better decisions.

I’m not going to give you a book review in this post, as there are far better sources on that.  I’m also not going to give you a in-depth synopsis.  What I am going to do is talk to you about are a specific subset of the topics discussed in the book.  The main concept in the book is around choice theory, i.e. that the way in which choices are presented can influence, or nudge, people towards a decision.

It’s all about Biases

In Nudge they are recommending governments frame choice for the purposes of helping people to improve their decisions in the face of biases.  However, they do lament that just as easily choice architecture can be used to manipulate you for business profit reasons.  My goal in this post is to help you to understand how you are being manipulated and also how to help yourself in decision making processes using these concepts.

Framing the Default Choice

It all starts with the default choice.  What choice is the default option if none other is chosen.  A huge portion of society will just go with the default option.  Status Quo bias is often to blame, basically a preference for the current situation.   Have you ever found yourself saying, “yes I’ll get to it later” and you never do?  That’s the default choice in action.   

Framing the Default Choice can Help or Hurt

The results from a corporate profit perspective are obvious.   Companies set the default scenario to be as advantageous to themselves as possible.  For example a subscription that auto renews.  Don’t kid yourself, this isn’t for you, it’s because odds are high you just will never actually cancel it.   Another example might be an introductory offer that goes up after the first 3 months.  Sure you could call and complain and they might give you the same discounted rate, but honestly not that many people do so or they would not structure things as such.

Nudge recommends well thought out defaults as a solution to status quo bias.  In the realm of something like a new hire starting with a company and opening a 401k, they recommend better savings results occur by starting their account with a default contribution level.   Where items cannot be defaulted they recommend a structure where you force a decision.  In other words either do not allow you to take the status quo option, or make the option a good choice.

Framing the Default Choice as a Way To Improve

That type of design helps the masses, but it can also help you.  The more you automate your financial life, the more you essentially set the status quo or default level to benefit you.  For example scheduling an automatic contribution to an investment account on a monthly basis or auto paying your bills so you don’t forget would be good options.  Basically make the automation your best choice or force yourself to reevaluate on a regular basis.

I would be remiss before I get off this topic if I did not mention this is the primary realm of Fin Tech.  Most financial apps and services are basically hoping to automate your default choice in case you can’t.  This is what robo advisors are actually doing.

The Framing of a Question can Influence the Answer

The book doesn’t stop with defaults though.  Another big issue occurs with how you frame a question.   Imagine I told you 5 % of people who invest in the stock market will never become Financially Independent.  Your reaction would be decidedly be different if I told you 95% of people who invest in the stock market will become Financially Independent.  Just that simple switch of wording can trigger our brains to make a completely different action if we are not paying close attention.

Companies do this largely with pricing.  They will tell you a car is 50% off, and focus on that instead of the actual cost involve.    Now if they instead told you it costs 10K to buy this car people in general tend to have a different reaction.    Car dealers might also focus a discussion on the monthly cost of something rather then the total cost.  Again simple framing of the question can trigger different responses.  Be on the lookout for these phrasings when making a decision.

Question Framing as a Self Improvement Tactic

The key for your own decision making process is to phrase things you want to achieve in a positive light.   The power of a positive thinking pays dividends.    It will keep you motivated and driving towards your goal.  So for example if you set an investment goal.  You could word it a few ways to yourself.  You could say I hope to invest 10K this year.   This might not be as effective as a different wording.  Say you made 200K a year in income.  Saying I will invest 5% of my income next year might be easier to stomach even though it’s the same result.  It’s also a less passive statement denoting a faith in outcome.  Structure your goals to both affirm you will make them and word them to the positive.

Framing with Respect to Number of Choices

You’ll notice in each one of these examples I really only list 2 options for wording.  This is with good reason, the human mind doesn’t do well with too many options.  Which brings us to another concept from Choice architecture, limiting choices and the information about those choices to avoid overload.   Too many choices leads to bad ones.

In the case of your own decision making this is why I always recommend starting from your overall goal.  Essentially limiting and honing in on your decisions before you have to make one is best.  So for example with savings, you start from choosing how much to invest, then what asset allocation, and then specifically where.  But you don’t make each decision at once, you narrow things down into manageable bite size decisions so as not to overwhelm, each one limiting the next set of decisions.

Time Bound Framing

The next one is the impact of timeline on bias.  Pretty much the longer until the impact of your choice will be felt, the more potential for some bias to influence that decision.  This is why I always recommend breaking things down into short term goals.  If you set goals that will not be attained for 10 more years, with no waypoints between, you will likely never get to your goal thanks to biases.  If you set once for every 2-3 months then your impact is felt much sooner and will likely lead to better results.

Companies take advantage of this one by delaying the financial or other type of negative impact of a purchase.  A great example we already mentioned is the monthly payment of a car.  By spreading out the financial impact they delay the impact of your purchase in a way that impacts your decision.

Clustering or Grouping

The final area of choice architecture is how options are grouped.   The example given in the book is just too perfect so I will go there first.  The concept of grouping your spending into budget categories comes in.    In some ways category budgeting is good, as it allows you to focus on areas to cut spending.  That being said it’s still an arbitrary concept since money is fungible.  The problem is it can also lead to increased spending if done wrong.  Depending on how you group things you could end up making an area look smaller or less of an opportunity to address then it really is.  The number of categories and types can also do this.

Say for example I measure how much a month I spend on food.  If I include all meals at home it’s one number.  If I include all meals out as well it may be a significantly different number.  Separate they may not seem that large, but together they may represent a much larger portion of your budget and thus represent a significant lifestyle leak.  Typically, if you are doing budgeting I would recommend aligning the categories with your goals. 

I also might recommend categorizing things a few different ways before actually making decisions on where to cut.  Companies use this to their advantage as well.    They may tell you this item performs better then it’s peers in 9 out of 10 categories. The thing is that 10th category may represent a hodge podge of all the things you find important.  Meanwhile the other 9 are small insignificant things.    Make sure to explore what the categories are and what is actually in them.

Any Other Examples Where Framing can Influence Your Financial Life

So that does it.   Do you have any other examples where you can apply choice architecture to your own decisions?  What about examples where companies use architecture to lead you towards their profit maximization?

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