Framing Effect
In the series of 21 behavioural biases we will discuss the
10th bias “Framing Effect”
Framing in simple terms can be defined as how you present a
piece of information or data that drives the desired results.
Communication is key to successful relationship and
business. How you frame your communication is the important key than the,
intrinsic value of the product.
You could find many examples of the same in our routine life
in dealing with family members or the outside world.
Companies advertise positive effects of the product and
services which could be lesser than the negative effects. Entire FMCG business
has used word “New and Improved” and “Free” so extensively to re-brand and
re-position their products.
Consultative sales became more popular in today’s information rich
world.
Brick and mortar retailers are focusing more on the
consultative/need based sales techniques. Here the online giants are struggling
to deal with.
How framing is done? Let’s take an example. If I say that
the Movie A is just 1 star less and movie B is 4 star. Which one will you
choose? Most likely you will chose movie B which is 4 star. Actually both the
movies are rated sameJ.
Our mind analyses information differently and may not be rationally.
Same is true in Investing also!!
When markets are in bear phase, all communications are pessimistic
and gloomy. Investor reactions are also same. They stay away from Investing.
When markets move into bull phase, suddenly all investors flock into markets.
Actually reverse should have been done. Framing of communication by media
drives the Investor’s behaviour. Advisor
is must have to make sense, in current information rich world.
In our industry of Investment
advisory, most of the advisors frame their communication on the returns of the
product and that’s about it!! Investors are also driven by the same eventually.
Nothing wrong isn’t it??
At Wealthcare Investments, we pay attention to risk also. We firmly
believe that high return is worth considering provided the risk is reasonable.
Unreasonably high risk only increases jitter rather than return. We
felt that markets are expensive since 2 yrs and avoided Small & Midcap
funds completely. Now in my TV shows and Blogs, I maintained that market should
do well hereon and started to deploy aggressively in Equities. Announcement by
FM on last Friday, is something that was unexpected and historical. Whole
market and corporate India was taken by surprise by with that.
We design portfolio
basis the risk presented in markets. More attention to Micro economic factors
(domestic) than Macro economic factors (Global). Needless to say, we do
consider individual’s goals, risk appetite and time horizon!!
So in nutshell, seller designs communication such a way that
positives are projected more prominently. Consumers/Investors have to be
mindful of the same and make good judgement.
What should you do?
1)
Understand that each and every communication is
framed to advantage of the service provider and you can’t avoid it. You should
recognize the same in Investing.
2)
Try to think contradicting style. Ask if the
market is cheap or expensive? What stage of the market we are in?
3)
Research for information which is not in
headlines and make sense out of it.
4)
Hire financial advisor who is capable of doing
the job. Not all advisors are smart to understand the marketsL.
5)
Avoid copying what others are doing!! What
majority does is not prudent and rewarding in investing.
MF Trivia: There are equity oriented Mutual funds which
protects reasonable amount of downside of equity fall. If markets fall over 10%
in 1 year, such schemes may actually deliver 0-3% absolute returns over the
same periods. Meaning no loss to capital, but infact some gain.
This article
is written by Bhavesh D Damania founder of Wealthcare Investments.
You can
reach him at 9833778887 and wealthcarein@gmail.com
"Risk comes until you know what, where and why you are
Investing"
No comments:
Post a Comment