4.11 Framing Effects The first step in making a decision is to frame the question. It's also one of the most dangerous steps. The way a problem is framed

4.11

Framing Effects

The first step in making a decision is to frame the question.

It's also one of the most dangerous steps.

The way a problem is framed can profoundly influence the choices you make.

A frame can establish the status quo (recall lecture 3.44) or introduce an anchor (recall lecture 1.101). It can highlight investment costs or lead you toward confirming evidence.

Friday 21 April 2023 09:26 AM

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Framing Effects

How a question is posed can be crucial, for instance.

Have you stopped beating your wife?

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Framing Effects

This discussion closely follows that of Kahneman (2011). Not all frames are equal, and some frames are clearly better than alternative ways to describe (or to think about) the same thing. Consider the following pair of problems:

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Framing Effects

A woman has bought two $80 tickets to the theatre. When she arrives at the theatre, she opens her wallet and discovers that the tickets are missing. Will she buy two more tickets to see the play? A woman goes to the theatre, intending to buy two tickets that cost $80 each. She arrives at the theatre, opens her wallet, and discovers to her dismay that the $160 with which she was going to make the purchase is missing. She could use her credit card. Will she buy the tickets?

In each scenario, what would you do?

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Framing Effects

Respondents who see only one version of this problem reach different conclusions, depending on the frame. Most believe that the woman in the first story will go home without seeing the show if she has lost tickets, and most believe that she will charge tickets for the show if she has lost money.

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Framing Effects The explanation should already be familiar - this problem involves mental accounting and the sunk-cost fallacy. The different frames evoke different mental accounts, and the significance of the loss depends on the account to which it is posted. When tickets to a particular show are lost, it is natural to post them to the account associated with that play. The cost appears to have doubled and may now be more than the experience is worth. In contrast, a loss of cash is charged to a “general revenue” account - the theatre patron is slightly poorer than she had thought she was, and the question she is likely to ask herself is whether the small reduction in her disposable wealth will change her decision about paying for tickets. Most respondents thought it would not.

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Framing Effects The version in which cash was lost leads to more reasonable decisions. It is a better frame because the loss, even if tickets were lost, is “sunk,” and sunk costs should be ignored. History is irrelevant and the only issue that matters is the set of options the theatre patron has now, and their likely consequences. Whatever she lost, the relevant fact is that she is less wealthy than she was before she opened her wallet. If the person who lost tickets were to ask for my advice, this is what I would say: “Would you have bought tickets if you had lost the equivalent amount of cash? If yes, go ahead and buy new ones.” Broader frames and inclusive accounts generally lead to more rational decisions.

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Framing Effects In the next example (Larrick and Soll 2008), two alternative frames evoke different mathematical intuitions, and one is much superior to the other. The paper identified a case in which passive acceptance of a misleading frame has substantial costs and serious policy consequences. Most car buyers list petrol consumption as one of the factors that determine their choice; they know that high-mileage cars have lower operating costs. But the frame that has traditionally been used in the United States - miles per gallon - provides very poor guidance to the decisions of both individuals and policy makers. Consider two car owners who seek to reduce their costs:

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Framing Effects Adam switches from a gas-guzzler of 12 mpg to a slightly less voracious guzzler that runs at 14 mpg. The environmentally virtuous Beth switches from a 30 mpg car to one that runs at 40 mpg.

Suppose both drivers travel equal distances over a year (say 10,000 miles). Who will save more fuel by switching?

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Framing Effects You almost certainly share the widespread intuition that Beth's action is more significant than Adam's: she reduced mpg by 10 miles rather than 2, and by a third (from 30 to 40) rather than a sixth (from 12 to 14). If the two car owners both drive 10,000 miles, Adam will reduce his consumption from a scandalous 833 gallons to a still shocking 714 gallons, for a saving of 119 gallons. Beth's use of fuel will drop from 333 gallons to 250, saving only 83 gallons. The mpg frame is wrong, and it should be replaced by the gallons-per-mile frame (or litres-per-100 kilometres, which is used in most other countries). As Larrick and Soll (2008) point out, the misleading intuitions fostered by the mpg frame are likely to mislead policy makers as well as car buyers.

Hyundai and Kia settle US mileage claims - FT - 3 Nov 2014Groups hit with $300m penalties for overstating fuel economy. The businesses will pay $100m, the largest civil penalty in the history of the US Clean Air Act and will forfeit greenhouse gas emission credits with an estimated value of more than $200m.

http://ftmail.ft.com/_act/link.php?mId=R81396583252982931186373010&tId=439153

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Framing Effects A directive about organ donation in case of accidental death is noted on an individual's driver license in many countries. The formulation of that directive is another case in which one frame is clearly superior to the other. Few people would argue that the decision of whether or not to donate one's organs is unimportant, but there is strong evidence that most people make their choice thoughtlessly. The evidence comes from a comparison of the rate of organ donation in European countries, which reveals startling differences between neighbouring and culturally similar countries.

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Framing Effects Johnson and Goldstein (2003) noted that the rate of organ donation was close to 100% in Austria but only 12% in Germany, 86% in Sweden but only 4% in Denmark.

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Framing Effects These enormous differences are a framing effect, which is caused by the format of the critical question. The high-donation countries have an opt out form, where individuals who wish not to donate must check an appropriate box. Unless they take this simple action, they are considered willing donors. The low-contribution countries have an opt-in form: you must check a box to become a donor. That is all. The best single predictor of check a box to become a donor. That is all. The best single predictor of whether or not people will donate their organs is the designation of the default option that will be adopted without having to check a box.

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Framing Effects People will check the box if they have already decided what they wish to do. If they are unprepared for the question, they have to make the effort of thinking whether they want to check the box. I imagine an organ donation form in which people are required to solve a mathematical problem in the box that corresponds to their decision. One of the boxes contains the problem 2 + 2 = ? The problem in the other box is 13 × 37 = ? The rate of donations would surely be swayed.

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Framing Effects When the role of formulation is acknowledged, a policy question arises: Which formulation should be adopted? In this case, the answer is straight forward. If you believe that a large supply of donated organs is good for society, you will not be neutral between a formulation that yields almost 100% donations and another formulation that elicits donations from 4% of drivers.

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Framing Effects - Reference Point

People’s trading decisions are affected by reference points, which act as performance benchmarks.

Suppose you are asked the question:

Primus owns 100 shares of an asset, originally bought at 100. Secunda owns 100 shares of the same asset, originally bought at 200. The price of the share was 160 yesterday and it is 150 today. Who is more upset?

It is the initial price, which determines how the stock is doing.

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A consequence of this is the disposition effect: an investor who needs cash and owns two stocks is much more likely to sell the stock whose price has gone up; see Odean (1998a).

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Framing Effects - The Disposition Effect

This discussion closely follows that of Kahneman (2011). A mistake that afflicts individual investors when they sell stocks from their portfolio:

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You need money to cover the costs of your daughter’s wedding and will have to sell some stock. You remember the price at which you bought each stock and can identify it as a “winner,” currently worth more than you paid for it, or as a loser. Among the stocks you own, Blueberry Tiles is a winner; if you sell it today you will have achieved a gain of $5,000. You hold an equal investment in Tiffany Motors, which is currently worth $5,000 less than you paid for it. The value of both stocks has been stable in recent weeks. Which are you more likely to sell?

What would you do?

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A plausible way to formulate the choice is this: “I could close the Blueberry Tiles account and score a success for my record as an investor. Alternatively, I could close the Tiffany Motors account and add a failure to my record. Which would I rather do?” If the problem is framed as a choice between giving yourself pleasure and causing yourself pain, you will certainly sell Blueberry Tiles and enjoy your investment prowess. As might be expected, finance research has documented a massive preference for selling winners rather than losers — a bias that has been given an opaque label: the disposition effect.

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The disposition effect is an instance of narrow framing. The investor has set up an account for each share that she bought, and she wants to close every account as a gain. A rational agent would have a comprehensive view of the portfolio and sell the stock that is least likely to do well in the future, without considering whether it is a winner or a loser.

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Selling losers and buying winners is referred to as a momentum investment strategy (Hong and Stein, 1998).

It is believed to outperform the contrarian investment strategy, that is selling winners and buying losers.

Yet, investors will be “disposed” to sell winners too soon and hold losers too long. Shefrin and Statman (1985) accordingly labeled this the disposition effect.

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Research shows the pervasiveness of framing effects: two logically equivalent statements of a problem lead decision-makers to choose different options.

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Framing effects typically involve differing frames whose logical equivalence is neither totally transparent nor terribly obscure, and the ways in which decisions are influenced is typically predictable by the features emphasized by the frames.

The most predictable influences of framing on choice relate to loss aversion and diminishing sensitivity, as outlined above. Because losses resonate with people more than gains, a frame that highlights the losses associated with a choice makes that choice less attractive.

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Similarly, a frame that exploits diminishing sensitivity by making losses appear small relative to the scales involved makes that choice more attractive.

Kahneman and Tversky (1979) introduced framing by means of the observation that a reference point may shift in such a way that a gain appears to be a loss or a loss appears to be a gain.

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Verbal labels may make a reference point salient, for instance, the content of meat products may be framed either as P% fat-free (making 0% fat-free the reference point) or (100-P)% fat (making 100% fat the reference point). P% fat-free will then appear to be a gain and be more positively evaluated than (100-P)% fat which appears to be a loss.

Levin and Gaeth (1988) found that whether fat content of meat was described as percentage fat or percentage fat-free even affected the taste of the meat.

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Tversky and Kahneman (1986, p. S254-5) give the following example of framing effects, taken from a study of medical decisions by McNeil et al. (1982):

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Respondents were given statistical information about the outcomes of two treatments of lung cancer. The same statistics were presented to some respondents in terms of mortality rates and to others in terms of survival rates. The respondents then indicated their preferred treatment. The information was presented exactly as follows.

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Problem (Survival frame)

Surgery: Of 100 people having surgery 90 live through the post-operative period, 68 are alive at the end of the first year and 34 are alive at the end of five years.

Radiation Therapy: Of 100 people having radiation therapy all live through the treatment, 77 are alive at the end of one year and 22 are alive at the end of five years.

Please note down the key figures.

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Problem (Mortality frame)

Surgery: Of 100 people having surgery 10 die during surgery or the post-operative period, 32 die by the end of the first year and 66 die by the end of five years.

Radiation Therapy: Of 100 people having radiation therapy, none die during treatment, 23 die by the end of one year and 78 die by the end of five years.

Please note down the key figures.

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Survival Mortality

Surgery RadiationSurgery Radiation

Initial 100 100 100 100

After treatment 90 100 100-90 100-100

Year 1 68 77 100-68 100-77

Year 5 34 22 100-34 100-22

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Survival Mortality

Surgery RadiationSurgery Radiation

Initial 100 100 100 100

After treatment 90 100 10 0

Year 1 68 77 32 23

Year 5 34 22 66 78

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The inconsequential difference in formulation produced a marked effect.

The overall percentage of respondents who favoured radiation therapy rose from 18% in the survival frame (n = 247) to 44% in the mortality frame (n = 336).

The advantage of radiation therapy over surgery evidently looms larger when stated as a reduction of the risk of immediate death from 10% to 0% rather than as an increase from 90% to 100% in the rate of survival.

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The framing effect was not smaller for experienced physicians or for statistically sophisticated business students than for a group of clinic patients.

This question is hypothetical, and real stakes might change the level of care that subjects give to the problem.

Controlled experiments of the issues above would be problematic.

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But the fact that experienced physicians make the same mistakes suggests that similar patterns might play out in the real world.

Similar framing effects were found in choices over lotteries with small monetary stakes.

More generally, it would be wrong to think that framing effects only matter when stakes are small, when the framing of the choices obscures the appropriate choice in an exceedingly subtle way, or when the decision context is hypothetical or non-economic.

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Tversky and Kahneman (1986, S251-278) cite some important real-world examples of framing effects.

As an illustration they approached respondents in a telephone interview who evaluated the fairness of the action described in the following vignette, which was presented in two versions that differed only in the bracketed clauses.

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A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment [but no inflation]. The company decides to [decrease wages and salaries 7%] this year.

Is this fair?

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A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment [and inflation of 12%]. The company decides to [increase salaries only 5%] this year.

Is this fair?

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A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment [but no inflation]. The company decides to [decrease wages and salaries 7%] this year.

A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment [and inflation of 12%]. The company decides to [increase salaries only 5%] this year.

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Although the loss of real income is very similar in the two versions, the proportion of respondents who judged the action of the company "unfair" or "very unfair" was 62% for a nominal reduction (first case) but only 22% for a nominal increase (second case).

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Framing Effects - Compartmentalization

People often fail to take into account the joint effect of their decisions. Suppose you are asked the question:

You face two concurrent decisions. Examine both decisions and state the options you prefer for each decision (note your choice for A and B).

Decision A: choose between a sure gain of 2,400 and a 25% chance of a gain of 10,000.

Decision B: choose between a sure loss of 7,500 and a 75% chance of a loss of 10,000.

Record your choices

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In accord with loss aversion, most people tend to choose the sure gain in A and the gamble in B. Now, consider the following question:

Choose between a 25% chance to win 2,400 and a 75% chance to lose 7,600 versus a 25% chance to win 2,500 and a 75% chance to lose 7,500.

There is no doubt about the right choice: the second option dominates the first one.

Record your choice

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However, note that the pair chosen in the first question amounts to the inferior option, while the pair rejected is equivalent to the dominating choice.

As detailed in the following slides.

People find it easier to deal with decisions one at a time and tend to forget the overall picture.

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In case you missed the link, most people tend to choose the sure gain in A and the gamble in B.

Decision A: sure gain of 2,400Decision B: 75% chance of a loss of 10,000

(So 2,400 plus either 0 at 25% or -10,000 at 75%.

That is 2,400 at 25% or (2,400-10,000) at 75%.)

That is 25% chance to win 2,400 and a 75% chance to lose 7,600 . The first combined option.

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In case you missed the link, most people tend to reject the gamble in A and the sure loss in B.

Decision A: 25% chance of a gain of 10,000Decision B: sure loss of 7,500

(So -7,500 plus either 10,000 at 25% or 0 at 75%.

That is 2,500 at 25% or (0-7,500) at 75%.)

That is 25% chance to win 2,500 and a 75% chance to lose 7,500. The second combined option.

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A common effect is the use of a “mental accounting” strategy by which people classify their savings (or expenses) in different segments and deal with them in different ways;

for instance, a windfall rise in income rarely finds its way in the (mentally separated category of) retirement savings or health insurance.

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Mental accounting refers to how people categorize and evaluate financial outcomes (Henderson and Peterson, 1992). Shefrin and Thaler (1988) assume that people categorize wealth in three mental accounts: current income, current wealth, and future income. It is furthermore assumed that the propensity to consume is greatest from the current income account and smallest from the future-income account.

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Framing EffectsFraming refers to the way our decisions are affected by the way information is presented. For instance, framing can influence whether we see a glass as half empty or half full. The same glass framed different ways can be perceived differently depending on the context. In the strip, Dogbert and his client describe as "dumb" those shoppers who think something labelled as "50 percent off" must be a bargain. Yet the client considers himself a "genius" when he falls victim to the same bias. Cartoon (Kramer 2014)

Framing shows up again in the strip when Dilbert's boss frames Dilbert's lack of a salary raise relative to the alternative of being attacked by bears, which Dilbert finds compelling. Cartoon (Kramer 2014)

http://dilbert.com/dyn/str_strip/000000000/00000000/0000000/100000/60000/5000/800/165855/165855.strip.gif

http://www.psychologytoday.com/blog/markets-in-mind/201401/dilbert-does-behavioral-economics

http://dilbert.com/dyn/str_strip/000000000/00000000/0000000/100000/60000/2000/300/162393/162393.strip.gif

http://www.psychologytoday.com/blog/markets-in-mind/201401/dilbert-does-behavioral-economics

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Framing Effects - AvoidanceHammond et al., 2006

1. Don't automatically accept the initial frame, whether it was formulated by you or by someone else. Always try to reframe the problem in various ways. Look for distortions caused by the frames.

2. Try posing problems in a neutral, redundant way that combines gains and losses or embraces different reference points. For example: Would you accept a fifty-fifty chance of either losing $300, resulting in a bank balance of $1,700, or winning $500, resulting in a bank balance of $2,500?

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Framing Effects - Avoidance3. Think hard throughout your decision-making

process about the framing of the problem. At points throughout the process, particularly near the end, ask yourself how your thinking might change if the framing changed.

4. When others recommend decisions, examine the way they framed the problem. Challenge them with different frames.

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A “Real” World ApplicationIn his booklet (Lynn 2010) provides instruction for waiters in the psychology of tipping as well as specific techniques that can be used to earn larger tips.

All the suggested techniques have been scientifically tested and the evidence of their effectiveness is described along with the techniques. Using even a few of these techniques should increase servers' tips by 10% to 30%.

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A “Real” World ApplicationWhat’s in it for the employer?

Managers might expect

1 Increased sales 2 Greater Customer Satisfaction 3 Lower labour costs due to reduced

server turnover

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A “Real” World ApplicationThe methods Tipping Expert Lynn 20101.Wear Something Unusual2.Introduces Yourself By Name3.Sell, Sell, Sell

– increased sales means increased tips4.Crouch Next To The Table (crouch – bend down)5.Touch Your Customers6.Entertain Your Customers7.Repeat Customers’ Orders8.Call Your Customers By Name9.Draw On The Bill ()10.Use Credit Card Insignia (On The Trays And Bill Folders)

- as we see in the group case study 511.Smile12.Write “Thank You” On The Bill13.Forecast Good Weather14.Give Customers Sweets (Mints)

http://tippingresearch.com/test.html

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Persuasion by Way of ExampleAn additional study examined the role of gratuity

guidelines on tipping behaviour in restaurants.

When diners were finished with their meals, they were given checks that either did or did not include calculated examples, informing them what various percentages of their bill would amount to.

Results indicated that parties who received the gratuity examples left significantly higher tips than did those receiving no examples.

Seiter et al. 2011 “Persuasion by Way of Example: Does Including Gratuity Guidelines on Customers' Checks Affect Restaurant Tipping Behavior?” Journal of Applied Social Psychology 41 150-159.

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Clothing Colour and TippingGentlemen Patrons Give More Tips to Waitresses

With Red Clothes

Red, relative to other achromatic or chromatic colours, led men to view women presented on a photograph as more attractive. The effect of colour on behaviour was tested in a tipping context.

Eleven waitresses in five restaurants were instructed to wear the same tee shirt with different colours. The effect of colour on tipping according to patron’s gender was measured.

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Clothing Colour and TippingIt was found that waitresses wearing red received

more tips but only with male patrons.

Waitresses colour had no effect on female patrons’ tipping behaviour.

The relation between red and sexual attractiveness are used to explain the results.

Managerial interests related with clothing appearance were discussed.

N. Guéguen and C. Jacob, 2014 “Clothing color and tipping: gentlemen patrons give more tips to waitresses with red clothes” Journal of Hospitality and Tourism Research 38(2) 275-280.

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Tipping is more prevalent in countries that are more

corruptUsing data on tipping behaviour in 32 countries (collected from The International Guide to Tipping) and comparing this against the Corruption Perception Index, researchers found that rates of corruption are higher in countries that tip more (the correlation was 0.6 where 1 would be a perfect match).

This may strike some as odd - tipping is often seen as altruistic, whereas corruption is immoral. Yet, the researchers propose that tipping to ensure future good service is comparable to a bribe and this could explain the puzzling association (Torfason et al. 2012).

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corruptIn a final study, researchers primed 40 US undergraduates with either a future-oriented or past-oriented approach to tipping. For this they used two versions of text ostensibly taken from the Emily Post etiquette guide. After reading that tipping should be performed as a way to ensure good service in the future (as opposed to rewarding past good service), the students tended to view two accounts of political and legal bribery more leniently.

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corrupt"The studies reported here highlight a psychological mechanism that may help explain the surprising association between tipping and bribery both within and across countries," the researchers said. They added that the findings raise some intriguing possibilities - for example, might encouraging people to give tips specifically as a reward for past good service act to reduce the tolerance of bribery in society? Magnus Thor Torfason, Francis J. Flynn, and Daniella Kupor (2012). Here Is a Tip: Prosocial Gratuities Are Linked to Corruption. Social Psychological and Personality Science. Tipping is more prevalent in countries that are more corrupt - BPS Research Digest

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Restaurants Are A Mine Field

Cynical tricks restaurants use to make you spend more revealed - Daily Mail - 18 Aug 2014By Vincent Graff

Why that “special” on the menu is a recipe for taking your cash: Revealed, the cynical tricks restaurants use to make you spend more

What’s so special about a restaurant’s “daily special”? It’s a familiar ritual. You’re sitting down, you’ve been handed the menu and the waitress launches into a florid description of an item that isn’t printed on the sheet she gave you.

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If you’re lucky, the “special” is just that, something delicious that the chef has whipped up from fresh ingredients that caught his eye at the market this morning. But very often the special — or “chef’s recommendation”, or “dish of the day” — is special only because it’s the most profitable item on sale, and the restaurant knows it will sell many more if the waitress singles it out for attention.

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Restaurants also know that most diners are too shy or embarrassed to ask for the price of the special — and, guess what, the waitress “forgot” to mention what the dish will cost you. The fake special is just one of the secret weapons restaurants deploy to make us spend more than we intend to when we go out to eat. In fact, the tricks begin as soon as you’re handed the menu (Poundstone 2014).

Priceless | William Poundstone | Macmillan

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And because we don’t know they’re doing it, they’re nearly always successful. For, whether we like it or not, every time we go out to eat, the restaurants are playing mind games with us — while we remain, mostly, innocently oblivious. “People rarely go into restaurants knowing exactly what they want to order or how much they want to spend,” explains Poundstone. “And we can be influenced by all sorts of things that we’re not aware of.”

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At the centre of all this is the humble menu. You might think that the restaurant menu merely tells you what items are available in a certain establishment. Actually, it is a very sophisticated piece of advertising. In fact, it’s the only piece of advertising that restaurant owners can be certain their customers will read. As a result, restaurants invite in “menu consultants” whose job it is to lay out a menu that will persuade you to spend more money than you’d expected.

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You may, for instance, have noticed that increasingly the prices on menus no longer employ the pound sign — or even any evidence of pence. Where once a steak might have cost you “£16.00” now its price is stated as “16”.

Pound signs are disappearing from menus as quickly as cod are vanishing from the oceans. And not just at fashionable restaurants. There are no pound signs at Carluccio’s, Byron, Giraffe or Cafe Rouge either.

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This is not a coincidence. A study (Yang et al. 2009) found that when, in a similar move, dollar signs were left off a menu, sales increased by eight per cent. Why so? $ or Dollars: Effects of Menu-price Formats on Restaurant Checks - Cornell School of Hotel Administration Simple, says Poundstone. “the more space you devote to something on a menu, the more people pay attention to it.”

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“so if you have a pound sign and the number of pence, it takes up more space on the page — and more space in your mental attention.”

“And obviously the restaurant does not want you to choose your food on the basis of price.” That’s also the reason why menus very often feature the items and their prices centred on the page, rather than having the prices all lined up in a tidy column on the right-hand side. If all the prices appear neatly one above another, says Poundstone, that just invites us to compare one against the other — which is the last thing the restaurant wants us to do.

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For that same reason, you now never see dots leading the eye from the description of the item to the price. Another key trick is known as “anchoring”. This is where a restaurant places a highly expensive dish prominently on the menu — solely in order to make the other dishes nearby appear relatively cheap. At Marco Pierre White’s Marco Grill in London, there’s a 35oz Tomahawk steak on sale for £70. Restaurants do not expect to sell many of these costly “anchor” items, says Poundstone.

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That is not their job — instead they are simply there to make the other dishes look like good value. Suddenly spending £21 on a plate of Marco’s grilled Dorset lemon sole doesn’t seem so outlandish. A lot of research has also gone into where we look when we first open a menu. It’s estimated that we read a menu for 109 seconds on average. Studies have shown that when presented with a list we remember best the item at the very start, and the one at the end — it’s the way our memories work.

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We will also turn our eyes first to the top right-hand corner of a page in front of us, whether it be a double-page or single-sheet menu. So that corner, of course, is usually where the most profitable items are placed. Poundstone says some of the other techniques are so commonplace, they seem unremarkable. Why might an item on the menu have a box around it? It’s not because it’s a dish the chef is particularly proud of, it’s because it earns a high profit for the restaurant.

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Alternatively, the menu might use other methods to draw our attention: an item in a different colour; an accompanying illustration; a different typeface. Spence (Spence and Piqueras-Fiszman 2014) is alert to the techniques in play.

Wiley: The Perfect Meal: The Multisensory Science of Food and Dining - Charles Spence, Betina Piqueras-Fiszman

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“I was in the burger restaurant Byron the other day,” he says. “the menu is all in black and white, except for one item, which is highlighted in bright red. And it’s their most expensive item.” Spence says that people are also likely to spend more if menus — and especially wine lists — are heavy to handle. And of course, even the words that menus use can persuade us to splash out.

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At the restaurant chain Giraffe — which was bought last year for £49 million by Tesco, a company that knows all about parting us from our cash — the toast is “artisan sourdough toast”, the chicken nuggets have a “sesame crunch coating” and the salsa is “fiery red roasted chipotle salsa”. Meanwhile the bresaola at Jamie Oliver’s Jamie’s Italian is “elegant slices of cured beef” and at West End eaterie The Ivy, in London, there’s an “heirloom tomato salad” and the carrots and beetroots are both labelled “heritage”.

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Spence says: “there’s research that demonstrates that if you give food a more descriptive label, people will enjoy it more — and they’ll also pay more for it.” One common example of this is to attach somebody’s name to a dish. At Randall & Aubin restaurant in London’s Soho, they serve “slow roast Aubrey Allen pork belly”.

Few, if any, of the punters will realise who Aubrey Allen is. For all anyone knows, it could be the name of the boy who sweeps up the pork fat in the abattoir. In fact, it’s the name of the butcher — based in a Coventry business park — who supplied the meat.

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The “chef’s recommendation” or “dish of the day” is special because it is the most profitable item on sale - and the restaurant knows it will sell more if the waitress singles it our for attention “this is a classic technique,” says Professor Spence. “It could be any name there at all. But attaching the words “Aubrey Allen” makes the dish feel like it’s more carefully chosen. It’s not just any old pork belly. And that allows them to put a premium on it.” If it’s any comfort, it’s not just us poor punters who are victims of these mean tricks.

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Restaurateur Russell Norman is the owner of a string of successful restaurants in London, including Polpo in Notting Hill. He is also innocent of all the sales ploys detailed here (except one: his menus do not use pound signs). “My pet hate is the use of hyperbole on menus,” he says. “When chefs or restaurateurs describe dishes as “delicious”, “mouth-watering” or “gorgeous”, I always think: “How dare you! I will be the judge of that, thank you very much.” ” But the other day, while on holiday in New York, even he fell victim to “anchoring”.

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Visiting a restaurant, he was mulling over which wine to choose from a list which featured several bottles that cost $2,500 (£1,500). “And because they had so many bottles that cost so much, I ended up buying a bottle of wine for $90 (£54). That’s nearly double what I’d normally spend. But they’d made it look cheap by comparison. “I’m a restaurateur — and I was still suckered!”

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A Test of Intuition

Frederick (2005) introduces a three-item "Cognitive Reflection Test" (CRT) as a simple measure of one type of cognitive ability - the ability or disposition to reflect on a question and resist reporting the first response that comes to mind. He shows that CRT scores are predictive of the types of choices that feature prominently in tests of decision-making theories, like expected utility theory and prospect theory.

Frederick S. 2005 “Cognitive reflection and decision making” American Economic Association 19 25-42.

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A Test of Intuition

Indeed, the relation is sometimes so strong that the preferences themselves effectively function as expressions of cognitive ability - an empirical fact begging for a theoretical explanation. The author examines the relation between CRT scores and two important decision-making characteristics: time preference and risk preference. The CRT scores are then compared with other measures of cognitive ability or cognitive “style.”

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A Test of Intuition

Despite the diversity of phenomena related to IQ, few have attempted to understand - or even describe - its influences on judgment and decision making. Studies on time preference, risk preference, probability weighting, ambiguity aversion, endowment effects, anchoring and other widely researched topics rarely make any reference to the possible effects of cognitive abilities (or cognitive traits).

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A Test of IntuitionThe Cognitive Reflection Test (CRT)

1. A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost ______ cents.

2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets ______ minutes.

3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake ______ days.

$0.05$0.90

55

4747

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A Test of IntuitionThe CRT was administered to 3,428 respondents in 35 separate studies over a 26-month period beginning in January 2003. Most respondents were undergraduates at various universities in the midwest and northeast of America.

The CRT scores exhibit considerable difference between men and women and the article explores how this relates to sex differences in time and risk preferences. The final section addresses the interpretation of correlations between cognitive abilities and decision-making characteristics. In short respondents who score differently on the CRT made different choices.

Frederick S. 2005 “Cognitive reflection and decision making” American Economic Association 19 25-42.

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Where Should You Invest?The Observer portfolio challenge pitted professionals Justin

Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick and Co, and Schroders fund manager Andy Brough against students from John Warner School in Hoddesdon, Hertfordshire – and Orlando.

While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat (Orlando) selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.Investments: Orlando is the cat's whiskers of stock picking - The Observer - Sunday 13 January 2013

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Where Should You Invest?

Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index. By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat's portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals' £5,176.60.

Investments: Orlando Is The Cat's Whiskers Of Stock PickingMark King - The Observer, Sunday 13 January 2013

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One would think that professional investors, such as mutual funds, hedge funds and institutional managers, would be behavioural-data investors. And indeed, the analysts within such organizations are most often behavioural-data investors. But the further up one goes in the organization and the larger the fund, the more like the crowd it becomes. This is because in order to grow assets under management, funds must attract and retain emotional investors, which means catering to client emotions and taking on the features of the crowd. As the fund grows in size, it increasingly invests in those stocks favoured by the crowd, since it is easier to attract and retain clients by investing in stocks to which clients are emotionally attached. A fund might also mimic the index to lock in a past alpha or become a closet indexer to avoid style drift and tracking error. Each of these represents a different way of catering to investor emotions (Howard 2013).

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So, what may start out as a fund managed by behavioural-data investors taking positions opposite the crowd often ends up morphing into something that is acceptable to the crowd. As argued by Berk and Green (2004), such behaviour is rational on the part of the fund, as revenues are based on assets under management. Consistent with this argument, others have found that returns decline as funds grow large (Howard 2013).

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In three studies on predicting the stock market, Ortmann et al. (2008) reported that recognition-based portfolios (the set of most-recognized options), on average, outperformed managed funds such as the Fidelity Growth Fund, the market (Dow or Dax), chance portfolios, and stock experts. In contrast, Boyd (2001) found no such advantage when he used college students’ recognition of stocks rather than that of the general public. It is imperative to understand why and under what conditions this simple heuristic can survive in financial markets without making a systematic market analysis. This remains an open question.

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Next Week

Asset Pricing

Documents

4.11 Framing Effects The first step in making a decision is to frame the question. It's also one of the most dangerous steps. The way a problem is framed