The Power of Framing in Decision-making
People handle risks differently. When it comes to deciding between two alternatives, both of which typically have pluses and minuses to them, there is a difference in the reference point you use to frame these alternatives.
According to research conducted by Kahneman and Tversky (Prospect Theory: an analysis of decision under risk), if you view a problem as a choice between losses, you tend to make risky decisions in the face of a sure loss. When you frame the alternatives as a choice between gains, you tend to make conservative decisions protecting against the sure win. It’s not wrong if you frame a problem as a choice between losses, yet it can be a foolish level of risktaking.
Example:
Alternative A- you accept a career offer extended today for $150,000 a year for a job you’re skilled at that is reasonably challenging and you’re a fit for OR…
Alternative B-wait for the response from another company job offer of something you’d really like to do, that has a 50 percent probability to come through, but where you’d take a $10,000 a year salary reduction to start.
If you can manage financially, you’d likely hold out for Alt.B, but it is the riskier of the two alternatives in that it exposes you to greater loss if it doesn’t come through and even some if it does in the short-term. There are many situations where more than one or two alternatives are available. But how you handle this if seen as a choice between losses or a choice between savings can make a big difference.
What is your tolerance for risk and how do you typically frame alternatives during decision-making?
Tags: alternative choices, choicemaking, decisionmaking, risktaking
