Question

Choose the statement that people are more likely to choose based on the framing of the choice. $\left[{\mathrm{LO}}_{23}.5\right]$ a. Stock investment: i. Invest in a stock with low uncertainty of return. ii. Invest in a stock with high certainty of return. b. Car purchase: i. Buy a car that costs $\mathrm{\$}20,000,$ which is $\mathrm{\$}5,000$ cheaper than the next level for that maker. ii. Buy a car that costs $\mathrm{\$}20,000,$ which is $\mathrm{\$}5,000$ more expensive than the lower level for that maker. c. Movie choice: i. Go to the movie that 100 out of 150 people give a five-star rating. ii. Go to the move that 50 out of 150 people give less than a five-star rating. d. Choice of college class: i. Take a class in which 50 percent of students get an $A$. ii. Take a class in which 50 percent of students don'\operatorname{tg} e t ~ a n ~ $\mathrm{A}$.

Short answer

People likely choose: ii, i, i, i based on positive framing.

Step-by-step solution

Understand the Concept of Framing

Framing refers to how options are presented or described. It can influence decision-making by highlighting specific aspects, making certain options seem more appealing than others, even if they are essentially the same.

Analyze Stock Investment Choice

In option a), compare i. "low uncertainty of return" vs ii. "high certainty of return". Both options mean the same in terms of risk, but "high certainty of return" might sound more appealing due to positive framing.

Analyze Car Purchase Scenario

In option b), compare i. saving money compared to the higher model (saving-focused) vs ii. spending more compared to the lower model (spending-focused). Positive framing suggests people prefer savings, so they may choose option i.

Evaluate Movie Choice Framing

In option c), compare i. positive ratings highlighted (100 out of 150) vs ii. negative ratings (50 out of 150). Option i emphasizes positive feedback, making it more appealing.

Assess College Class Preference

In option d), compare i. percentage achieving an A (50%) vs ii. percentage not achieving an A (50%). Option i highlights success, making it more attractive.

Determine Likely Choices

People generally prefer choices framed positively, so likely preferences are: 1. ii (high certainty of return) for stock investment 2. i (savings-focused) for car purchase 3. i (positive ratings) for movie choice 4. i (success-focused) for college class.

Key concepts

behavioral economics

Behavioral economics is a fascinating field that combines insights from psychology and economics to understand how people make financial decisions. Traditional economics assumes that people are perfectly rational actors who make decisions purely based on cost-benefit analyses. However, behavioral economics suggests that human behavior is often less logical and more influenced by emotional and cognitive biases.
Framing is a key concept in behavioral economics. It involves presenting information in a way that influences people's choices. How a decision is framed can lead to different outcomes even if the underlying information is the same. For example, people might perceive a 90% chance of success differently than a 10% chance of failure, even though these two scenarios are numerically identical. Behavioral economists study these "irrational" tendencies to better understand real-world decision-making.
Understanding framing in behavioral economics helps us explain why people sometimes make inconsistent or seemingly illogical choices. By recognizing these tendencies, individuals can make more informed decisions by critically evaluating how information is presented to them.

decision making

Decision making is the process by which individuals select an option from a set of alternatives. It involves evaluating the potential outcomes, risks, and benefits. In the context of the framing effect, decision making is significantly influenced by how choices are presented.
When faced with making complex or risky decisions, people often rely on mental shortcuts or heuristics to simplify the process. These shortcuts can be beneficial but can also lead to biases, such as the framing effect. For instance, when deciding on a stock investment option, describing it as having "high certainty of return" can lead people to favor it over the identical option described as "low uncertainty of return."
Effective decision making requires awareness of these potential influences. By understanding how framing can sway choices, individuals can take a step back and reframe the available options themselves to see past the bias. This can lead to more balanced and well-considered decisions, aiding in both personal finance and everyday life choices.

choice architecture

Choice architecture refers to the way choices are structured and presented to influence the decision-making process. It plays a crucial role in guiding individuals towards making specific decisions without constraining their freedom of choice.
This concept is widely used in marketing, public policy, and personal finance to nudge individuals toward more favorable outcomes. For example, in a car purchase decision, the way savings and spending details are highlighted can steer a consumer's preference without altering the actual cost. Presenting a car as $5,000 cheaper compared to a higher model can make it more attractive, emphasizing financial gain rather than an outright cost, even though the car's price remains unchanged.
In choice architecture, the key is subtle influence. By designing the decision environment thoughtfully, one can encourage choices that lead to better health, increased savings, or more sustainable behaviors. By understanding choice architecture, individuals can learn to recognize how options are framed to make more informed decisions while still considering their personal preferences.