Most of us view ourselves as rational people, but we may not realize the extent to which our judgments are clouded by context or circumstances. A conclusion that seems so obvious may become confusing in a different context. We also may view outcomes differently depending on the importance we place on them.
In the emerging field of behavioral finance, we refer to this effect as framing. In other words, people reach conclusions based on how questions are framed. We can take a look at how the New York State Lottery relies on framing to sell their tickets. The tag line for New York’s Lotto is “Hey, You Never Know.” This motto is so effective that it’s been trademarked. We are also told that we can’t win if we don’t buy a ticket.
We all know that the odds of winning are absurd. People are offered what we call a false choice: you can’t win if you don’t buy a ticket. The odds of winning New York’s “Pick Six” are 45 million to 1. Most people know this, but based on the context of “it’s just a few bucks” or “it’s entertainment,” they freely throw away their dollars. They would never throw the money out a window or light a cigar with it, but they feel fine about essentially doing the same thing by regularly buying lottery tickets.
In the financial arena, we see consumers getting attracted by the same types of inducements that are pitched to potential lottery winners: hold out hope for a rosy future and pay no attention to the present day costs. How bad a deal can you expect from legitimate sources such as your government? Would a company that has been around for years really put out products that were not in my best interest? They have to be doing something right if they are a national brand, right?
These are all frames through which we view financial decisions. Be aware of your framing lest you be framed.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION HERE.