Notes on a Nobelist, Part III: Kahneman on Framing
This is the third post in a three-post series that summarizes Daniel Kahneman’s Nobel lecture as printed in The American Economic Review in December 2003 (full free version). The first post was on heuristics of judgement and the second was on choice with risk. This post is about framing effects. Most of what follows is a paraphrasing of Kahneman’s words. Comments that are more fully my own are [in brackets].
The framing effect is observed when different but informationally (factually) equivalent presentations lead to different outcomes. The effect is achieved by alteration of the salience of different characteristics. [This idea has become well-known through intense media focus on political and issue polls and how their outcomes differ by phrasing.]
A nice example is suggested by Thomas Schelling in his book Choice and Consequence: Are you morally offended by tax deductions? I suspect not. What do you think of a tax policy that allows a larger reduction in taxes for the rich than the poor? Abhorrent, no? In fact, that’s exactly the result of tax deductions. This is framing at work.
Kahnmen explains the principle of framing as “the passive acceptance of the formulation given.” This leads to the apparent preference of the default option. For instance, enrollment of organ donation programs is substantially higher when individuals are assigned to it and need to opt out as opposed to excluded unless they opt in. Clearly framing is inconsistent with assumptions of rationality.
Notes on a Nobelist, Part II: Kahneman on Choice with Risk
This post is short. Use the balance of your time to read something else. Can’t find anything? Try one of my favorite sources.
This is the second post in a three-post series that summarizes Daniel Kahneman’s Nobel lecture as printed in The American Economic Review in December 2003 (full free version). The first post was on heuristics of judgement and a subsequent post will be on framing effects. This post is about models of choice in the presence of risk. As before, my comments are [in brackets] (actually, there is only one comment).
We only need to consult our own experience to verify that perception is reference-dependent. A bath of 80°F will feel warm relative to a 60°F one and cool relative to a 100°F one. The same is true about our satisfaction with respect to different states of wealth. That is, we can be risk averse with respect to gains while loss averse with respect to loss. It matters a great deal what the starting point (the reference point) is.
Kahneman goes to great length in his article to stress that prior work that assumed reference-independence is a poor model of individual behavior. A main idea of his “prospect theory” is that the degree to which we value a unit of wealth depends on our initial endowment. Studies have found that the selling price an individual would assign to a good is often a factor of two higher than the buying price he would assign. That is, the value assigned to the good depends on whether or not you own it (the “endowment effect”).
Such reference-dependent decision making helps promote the maintenance of the status quo as the disadvantages of alternatives loom larger than advantages. [Political implications...]
Notes on a Nobelist, Part I: Kahneman on Heuristics of Judgement
I’ve been reading some behavior economics literature. I started with the excellent overviews by Camerer and Camerer and Lowenstein and then moved on to Daniel Kahneman’s Nobel lecture. For his work in behavioral economics Kahneman shared the Nobel prize in economics in 2002 with Vernon Smith. A revised version of Kahneman’s Nobel lecture was printed in The American Economic Review in December 2003 (full free version). Kahneman’s lecture (paper) reviews the three lines of his research: (1) heuristics of judgement, (2) models of choice under risk, and (3) framing effects. In this and two subsequent posts I provide my notes from my reading of the paper.
This first post is on (1) heuristics of judgement. Naturally, the second post will be on (2) models of choice under risk, and the third post will be on (3) framing effects. Most of what follows is a paraphrasing of Kahneman’s words. Comments that are more fully my own are [in brackets].
There are two modes of thought: reasoning and intuition. Reasoning may lead to more rational decisions while intuition is more likely to lead to faulty judgements. This is illustrated by a simple puzzle credited to Shane Frederick. “A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?” Likely more than half of individuals can solve this puzzle with some moments of thought. Yet most provide an incorrect answer of “10 cents” relying on intuition alone.
A useful distinction between reasoning and intuition is the degree of effort. Reasoning requires effort and diverts the mind from other activities, forcing it to take shortcuts that would not be taken if not distracted by mental effort. Intuition requires little effort. One can operate a car intuitively (without much mental effort) and therefore conduct a conversation requiring substantial mental effort at the same time. [Though in such a case one may operate the car perfectly but navigate it poorly (missing turns, etc.).]
Intuition is akin to perception: it is immediately accessible and requires no effort. It generates impressions, many implicit, non-voluntary, and not expressed, of the attributes of objects and ideas. More reasoned judgement may be built upon impressions and are explicit and intentional. This hypothesis of intuition–that it is perception-like–motivates a focus on analogies from perception. Tricks of perception are at least metaphors of intuitive errors. The immediate accessibility (or “intuitive grasp”) of the properties of an object upon seeing it bear a cognitive resemblance to our readily intuited thoughts about an idea upon encountering it. The representation of a prototype of an object [e.g. an apple] is highly accessible, [as is our intuition about an idea, choice, puzzle, or decision (the source of bias?)]. The term natural assessments applies to the attributes immediately brought to mind without intention or effort. The natural assessment of “good” or “bad” plays a key role in our judgements and is one for which special brain circuitry exists.
Accessibility of properties about an object, situation, or thought is a continuum, varies by individual, and can be altered with training. A chess master has immediate access to the attributes of a configuration of chess pieces that a novice does not perceive even with intense effort. Salience plays a role in relative accessibility of attributes. Context, grammar, and various forms of presentation influence salience. The degree of accessibility of various thoughts differ upon hearing each of the sentences “Team A beat team B” and “Team B lost to team A” even though they are logically equivalent. Sex sells even when it has nothing to do with the product with which it is associated.
Heuristics of judgement are achieved by an operation of attribute substitution, a form of intuitive thinking in which readily accessible attributes (so called heuristic attributes) of an object are used as proxies for the less accessible attributes (so called target attributes) relevant to a rational decision. Optical illusions take advantage of perceptual attribute substitution. Attribute substitution is a pervasive shortcut and the list of heuristic attributes identified is long, reviewed by Kahneman in his paper, but beyond the scope of this post.
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