Defining the Decision To Be Made

You have to be careful, however. Many a bad decision has been made as a result of poorly chosen frames. Frames are by definition highly selective; just like a window-frame they allow you to see only part of the picture. A window-frame installed in the roof of a building, for example, is great for star-gazing, hopeless for admiring the swans on the lake outside your house.

Every decision we make comes complete with its own frame, and most of the time we are unaware of which frame we are using. Good decision-makers, however, make a special effort to understand the frame they are instinctively drawn to, and to widen or alter it where necessary.

Prospect Theory

Part of the difficulty we have in understanding our own frames is that we tend to be quite irrational when constructing them. In the late 1970s, psychologists came up with so-called ‘prospect theory’ as a way of explaining how we use frames the way we do. It can be easily demonstrated using simple dilemma-based scenarios. For example, in the scenario below, based around the purchase of a theater ticket, participants were first asked whether they would buy a new ticket to replace one they had just lost. They were then asked if they would buy a ticket for the first time having just discovered that they had lost cash to the value of the ticket. A far greater proportion of people were willing to buy a ticket in the second instance than in the first.[1]

A trip to the theater
Dilemma 1 – You are standing outside a theater, about to go and see a play. You reach into your pocket and find that your ticket has gone. It cost you £40. The box office will sell you another one for the same amount.
Would you buy another ticket?
Dilemma 2 – You are standing outside a theater, about to go and see a play. You haven’t bought a ticket yet. At the box office, you get out your wallet and discover that the £40 you had this morning has gone.
Would you buy a ticket now?

Looking at the situation logically, this seems curious. After all, the individual has lost exactly the same amount of money in both scenarios. Yet people are more likely to feel irritation at the loss of the ticket because they feel it would be akin to spending £80 on a single theater ticket. In the second instance, the lost cash does not have as close a connection with the theater ticket, even if the end result is the same.

Managers faced with a scenario similar to this in their working lives should, rationally, behave the same way in both instances, yet few do. One of the reasons for this is that they are unaware of the frames through which they are seeing the world. If they are going to exclude a key aspect of the situation (in the above case, the fact that a theater ticket worth £40 is worth the same as £40 cash) then it is important that they realize they are doing so. In this case, the participants were unaware they were doing so.

Another scenario shows how people treat risk differently according to how it is presented to them. It involves a car manufacturer that is considering closing down three of its factories. Participants are asked to choose one option from each of two sets of rescue plans.[2]

Job savers
A large car manufacturer has recently been hit with a number of economic difficulties, and it appears as if three plants need to be closed and 6,000 employees laid off. The vice president of production has been exploring alternative ways to avoid this crisis. She has developed two plans:
Plan A: This plan will save one of the three plants and 2,000 jobs.
Plan B: This plan has a one-third probability of saving all three plants and all 6,000 jobs, but has a two-thirds probability of saving no plants and no jobs.
Which plan would you select?
Alternative options
When you have made your choice, read through the problem again, replacing the first two plans with the alternative set below.
Plan C: This plan will result in the loss of two of the three plants and 4,000 jobs.
Plan D: This plan has a two-thirds probability of resulting in the loss of all three plants and all 6,000 jobs, but has a one-third probability of losing no plants and no jobs.
Which plan would you select?

Objectively, each set of plans is identical to the other. The only difference between plans A and C, and plans B and D, is in their wording. For instance, there is no objective difference between saving one in three plants and 2,000 jobs, and losing two in three plants and 4,000 jobs. Yet the vast majority of people asked this question tend to choose Plan A in the first set and Plan D in the second set.

This is because we tend to frame our judgements according to how we perceive the issue, and we do this by creating a reference point against which we can weigh the options. In the first set, where the plans are framed positively (saving plants), the reference point is a negative one, i.e. the loss of three open plants. Compared to this dire possibility, saving one of the three plants sounds highly sensible. In the second set, the plans are framed negatively (losing plants), and our reference point is positive: we concentrate on the three open plants. When we do this, the comparatively small chance of being able to keep this state of play is irresistible.

There is something else at work here. We tend to overestimate the likelihood of low-probability events, and underestimate the likelihood of high-probability events.[3] This is especially the case when there is a low probability of a gain, rather than of a loss, since we also tend to respond more strongly when we lose something than if we gain something. If you are not convinced by this, ask yourself the following question. Which is stronger: the pain of losing £30 or the pleasure of winning £30? Most people would select the former.

Prospect theory

• How the issue is presented (framed) can radically change what we believe is the key reference point against which we compare our options. This has a strong impact on our final decision.
• We respond more strongly to loss than to gain.
• We tend to overestimate the likelihood of low-probability events, and underestimate the likelihood of high-probability events.

Thirst for a Bargain

Another common example of how we frame things incorrectly is illustrated by another theory called transactional utility, which describes that we are easily motivated by what we regard as a good deal. We tend to judge something a good deal when its cost is very reasonable in comparison to what it should ordinarily cost. The theory explains the reason why we might find it hard to resist buying a T-shirt that is ‘60% off’ in a sale and not because we particularly need or want it. We are likely to buy the item even if it is on sale in an expensive store and its reduced cost still exceeds what we would normally pay for a T-shirt.

In such an instance, we are likely to view the purchase through a different frame because our reference point has been altered by the size of the reduction. This can be dangerous, because it can lead to us acquiring unnecessary goods or services that we do not need, or even cannot use. How many of us, for instance, have bought an item of food at a supermarket purely because it has a last-minute reduction sticker on it, and then had to throw the item away because we did not have time to consume it that day?

You should be aware, however, that we can also be attracted to a deal purely by the way it is presented, rather than its inherent value for money. Food manufacturers have been aware of this for some time, with their advertisements boasting 85% fat-free products.

Which would you prefer, a cake that is 85% fat-free, or a cake containing 15% pure lard?

Similarly, as a manager you will need to watch out for proposals that seem better than they really are: if a team member pitches an idea to you that he says will save you £4,000 over five years, you need to be sure that the £800 annual saving represents good value based on the total value of the deal (which may be £100,000 for all you know).

Frames of Thought

Just as important as the frames we have already looked at are so-called ‘frames of thought’. These are frames based on the way we as individuals tend to see the world. They are influenced by our education, experience and cultural background. We may look at an issue in a manner that is too trusting or cynical, naïve or prejudiced. For example, someone with a psychology degree may usually read a psychological problem or angle into something. Breaking out of this frame(s) of thought is difficult, but essential because no single frame is suitable for every decision you make. On the contrary, every decision you make requires a completely different frame, or, as we shall see, several different frames.

Learning to Re-Frame

Now you are familiar with the idea of frames, and the significant power that they can hold over the decision you are about to take, you should be able to start to analyze and understand the frame under which you are operating. If you can do that, you will then be able to decide whether it is appropriate and, if it is not, to change it.

Russo and Schoemaker have come up with a simple four-step model for framing decisions.[4]

Framing decisions – a framework

• Identify the frame you or your organization would automatically (and often unthinkingly) use.
• Find one or more reasonable alternative frames.
• Analyze where each frame fits and what it distorts or leaves out of bounds.
• Match the frame to the problem, i.e. choose from the alternative frames the one (or ones) that you consider most appropriate.

1. In the first stage, you need to identify the frame you, or your organization, are most likely to use to make this decision. Write it down. Question it. Look over the examples of misframing given above. Write down any ideas you might have about how your frame might contain elements of those examples.
2. The second stage, in which you search for alternative frames through which to view the issue in hand, is the most important. Think about how you normally approach an issue such as this. Is that really the best way of doing it? Talk to people, think about what other people would do, perhaps people in another department, another company. Be creative.
3. Now you should have a list of different possible frames. Which is the most appropriate? Spend some time playing with the frames, perhaps borrowing elements from each and attaching them to other frames to make new ones. What seems to fit?
4. Finally, match the frame to the problem.