The "framing effect" is the principle that our choices are influenced by the way they are "framed," or presented to us, often by the media and advertisers.
A classic example is advertising beef that is 80% lean vs 20% fat. While factually equivalent, the former frames the fact more positively and encourages a purchasing decision.
The power of the framing effect has been observed to increase with age and this is important with respect to financial information and decision-making.
In trying times such as the Financial Crisis of 2008 and the current difficulties related to the Covid-19 pandemic, it's easy to serve up, or "frame," examples that compare the current environment to something ominous from the past, such as the Great Depression.
While some specific statistics may bear resemblance, the lack of additional context related to those statistics often leads the audience to poor conclusions and bad decisions.
Over the last 20 years we've seen 3 major market downturns each stemming from different circumstances and triggered by different catalysts, but all resulting in similar deleterious effects for individual investors.
The first is the behavior known as "herding" where individuals follow the crowd without using their own judgment. This happens in both directions and during market downturns can lead to a double whammy where investors exit assets whose prices have already declined dramatically and pile into another for its perceived safety after it has already been bid up in price. There is little doubt that "framing" has undue influence in the behavior of "herding".
The second outcome is the loss of compounding that occurs from realizing big losses.
And finally, the opportunity cost that comes from being too conservative with one's investments while simultaneously ignoring the eroding effect of inflation on purchasing power over long periods of time. This last example is often born out of another behavioral bias known as the "recency effect" where we weigh recent events more heavily in our decision-making thus extrapolating them into the future.
Money and investing are emotional landscapes and most understand that emotion trumps logic. Being aware of the biases that get in our way is a good step toward improving our outcomes. Creating a written plan that anticipates challenges and guides our response is a practical way to stay on track.