Bias 12: Framing Effect

You are the head of an industrial company operating 600 plants with severe economic problems. After discussion with your strategic committee, two options have been retained. You have to decide which one to choose.

What do you do?

Option A: 200 plants will be saved.

Option B: 33% chance that your 600 plants will be saved and a 66% chance that all of them will close.

Unfortunately, your company is still suffering from problems. Now, in order to save one plant, you again have two options:

Option 1: You have to fire 400 employees.

Option 2: 33% chance to save all the jobs in the plant and a 66% chance you will have to fire 600 people.

What do you do?

In terms of risk and the respective proportion of losses and gains, the problems are identical. Option A and 1 are certain options where you lose respectively 400 plants and 400 jobs (and save 200 plants and jobs).

Optical Illusion Option 2 and B are risky options where there is a 33% chance to save all your plants and jobs, however,  there is a 66% chance you will lose all of them. Nevertheless, many people prefer option A in the first scenario and option 2 in the second scenario. Two biases are involved in these choices.

Framing effect:  The same problem presented in two different ways can lead to contradictory choices.

Loss aversion: most people are loss averse, that is to say they prefer avoiding to lose twice as much than they enjoy winning. The way the second scenario is presented activates this loss aversion while the first scenario does not.

Reference:

Thinking fast and slow, D.Kahneman