How can you use framing to manage uncertainty in economics?

1 What is framing?

Framing is the process of presenting or interpreting information in a certain way that highlights some aspects and downplays others. Framing can affect how you perceive the value, relevance, and credibility of information, as well as how you weigh the costs and benefits of different options. For example, framing a decision as a gain or a loss can influence your risk preferences, as shown by the famous prospect theory of Kahneman and Tversky. Framing can also affect how you react to uncertainty, as you may focus more on the worst-case or best-case scenarios, or on the most salient or familiar information.

2 How does framing affect uncertainty?

Framing can affect how you deal with uncertainty in several ways. First, framing can affect your attention and memory, as you may selectively recall or ignore information that confirms or contradicts your existing beliefs or preferences. Second, framing can affect your emotions and motivation, as you may feel more optimistic or pessimistic, confident or anxious, depending on how you interpret the situation. Third, framing can affect your judgment and decision-making, as you may use different heuristics or biases, such as anchoring, availability, confirmation, or overconfidence, depending on how you frame the problem.

3 Why is framing important in economics?

Framing is important in economics because it can have significant implications for individual and collective behavior and outcomes. For example, framing can affect how consumers respond to price changes, discounts, or promotions, how investors allocate their portfolios, how entrepreneurs evaluate opportunities and risks, how workers negotiate wages and contracts, how voters support policies and candidates, and how regulators design incentives and regulations. Framing can also influence how economic agents communicate and interact with each other, creating positive or negative feedback loops, coordination or conflict, trust or distrust.

4 How can you use framing to your advantage?

Framing can be beneficial in simplifying and organizing complex and ambiguous information, as well as motivating action in one's own best interest. However, it can also lead to suboptimal or irrational choices, or missing out on valuable opportunities and information. Therefore, being aware of how framing affects economic behavior is important. To use framing to your advantage, be mindful of how you frame your own decisions and goals. Try to avoid framing effects that distort perception, such as loss aversion or endowment effect. Additionally, be aware of how others frame information and options for you. Avoid being manipulated by appealing frames that appeal to emotions or social norms. Lastly, be strategic about how you frame information and options for others. Use framing effects that enhance credibility, persuasiveness, and cooperation. However, be sure not to use framing in a deceptive or unethical way as it could damage your reputation or relationship.

5 How can you learn more about framing?

Framing is an interesting and pertinent topic that draws from economics, psychology, and communication. If you want to learn more about framing and how it affects economic behavior, you can explore a variety of resources. These include books such as Thinking, Fast and Slow by Daniel Kahneman, Nudge by Richard Thaler and Cass Sunstein, Influence by Robert Cialdini, Predictably Irrational by Dan Ariely, and The Art of Choosing by Sheena Iyengar. You can also listen to podcasts like Hidden Brain by NPR, Freakonomics Radio by Stephen Dubner and Steven Levitt, Choiceology by Charles Schwab, Behavioral Grooves by Kurt Nelson and Tim Houlihan, and You Are Not So Smart by David McRaney. Additionally, there are courses like Behavioral Economics in Action at the University of Toronto, Behavioral Finance at Duke University, The Power of Framing at INSEAD, Introduction to Communication Science at the University of Amsterdam, and Mastering Negotiation at Harvard University.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?