113 - Is this a success or a failure—the value of reference points in framing decisions



This is a now-famous example from a 1984 paper by psychologists Daniel Kahenman and Amos Tversky.

Imagine that you are about to purchase a jacket for $125 and a calculator for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $10 at the other branch of the store, located 20 minutes drive away. Would you make a trip to the other store?

When presented with a problem, we have a tendency to plunge in. We accept the problem as presented and jump to solving it. When we do this, we let the first frame that comes to mind capture the problem. But the thing is, no frame is complete. Any single frame captures only a portion of reality, not all of it. Accepted without examination, what is within the bounds of a frame comes in our spotlight; what’s bounded out stays in the shadows.

Here are three frames with which to look at the Kahneman-Tversky question.

1️⃣There’s a gain of $5 to be enjoyed should you buy from the other store.

2️⃣Your purchase price will drop (33%) from $15 to $10 should you buy from the other store.

3️⃣You’ve to decide between a gain of $5 against the cost of driving 20 min (time, fuel, etc.).

Intuitively, you can tell that the bargain hunters are more likely to pick the first frame. Then there are those who like to nitpick. They’ll pick the third frame. Finally, there are those who judge gains or losses not for what they are but in relation to something else. They’ll probably choose the second frame.

Which frame did respondents most spontaneously use for this decision?

To find this, Kahneman and Tversky made one simple change. Keeping the size of the gain ($5) and the size of the inconvenience (20-min drive, fuel costs, time of the day, etc.) the same, they created a second version of the question where they switched the price of the items. The jacket now cost $15 and the calculator cost $125 at the first store. The same calculator was available at the distant store for $120.

What did they find?

More than two-thirds (68%) of the respondents (N = 88) were willing to drive to the distant store to save $5 on a $15 calculator, but less a third (29%) of the respondents (N = 93) were willing to do the same to save $5 on a $125 calculator.

If the size of the gain ($5) and the size of the inconvenience (time, fuel costs, etc.) were exactly the same across the two situations, why did the respondents judge them differently? Because of the decision frame they used.

Breaking a frame down

The first frame kept only the size of the gain within its boundaries. $5 was the only point of salience. Within this frame, it only mattered whether or not you were making a saving. The cost incurred to enjoy that saving was outside the frame, and hence not considered. The question that frame #1 asked of the participants was simple and narrow: Is $5 a big enough amount for me to save?

The second frame was broader. It considered the trip worthwhile because it resulted in a reduction in the price of the calculator by $5. Yet, this frame too was narrow, though not as narrow as frame #1. Why?

It linked the potential savings to the price of the calculator. It excluded the price of the jacket. Imagine if it did. The participants would’ve realized, ‘Hey, for these two things I need, I’m spending $140 in all at the first store and $135 if I visit the other store. That’s a saving of $5 on $140!’

But clearly, it didn’t as seen in the responses of the survey participants. Most of them excluded the price of the jacket in their mental math. They only paid attention to the price of the calculator when considering the relative savings. The question in their minds was: Save $5 on $15 or $5 on $125?

The second frame therefore differentiated between two gains of the same size ($5) by introducing a reference point (save $5 on a $15 calculator or $5 on a $125 calculator?). It seemed to tell the respondents: The size of your gain should be inversely related to the price of the calculator and should be independent of the price of the jacket. Framed this way, the choice was obvious. But was it?

In the second frame, the willingness of the participants to drive 20 minutes to the second store increased significantly when the price of the calculator changed without any change to the size of the savings.

The third frame fixed this anomaly by expanding the parameters under consideration. It was the most comprehensive. It compared the size of the savings with the _total _size of the inconvenience. Which is, gas costs, driving time, car running costs, and any other opportunity costs. The third frame is also the most work.

💡A hat tip to avoid wasteful expenses that may feel like a bargain at the time of purchase: Sometimes we get drawn to mouth-watering prices and that weighs disproportionately in our purchase decision. That is, the quality of the bargain is dominant in our frame. But you should only consider the relative gain after it is clear to you that the item of purchase is valuable to you. Don’t buy shoes you don’t need just because they’re on sale at throwaway prices. See [issue

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