The Influence of Framing on Financial Decision-Making and Risk Tolerance

Abstract

Classical economic theory assumes rational decision-making, as introduced by Adam Smith's concept of the "invisible hand," but real-world behavior frequently deviates due to cognitive biases like the framing effect. Behavioral economics, pioneered by Kahneman and Tversky, reveals that decision-making is influenced by how information is presented, leading to risk aversion in gain scenarios and risk-seeking in loss scenarios. This study explores these dynamics by presenting participants with positively and negatively framed financial scenarios, focusing on investment decisions. Participants from diverse demographics completed surveys designed to isolate the effects of framing on financial behavior. Scenarios varied across key variables, including potential gain/loss magnitude, investment duration, external news, and personal financial contexts. A fixed initial capital of $150,000 was used to ensure uniformity in decisionmaking, with additional scenarios personalized to participants’ income levels to evaluate framing's impact in realworld-like settings.

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