In the Asian disease problem, 72% of subjects chose the certain option ('200 people will be saved') in the gain frame, while 78% chose the risky option in the loss frame ('400 people will die' with 1/3 probability of no deaths). This reversal occurs because...
APeople cannot do the math to see that the options are equivalent
BThe gain frame activates risk aversion (concave value function for gains) while the loss frame activates risk seeking (convex value function for losses)
CPeople always prefer certain outcomes regardless of framing
DThe loss frame triggers anger, which causes random responding
Prospect theory predicts this pattern directly. In the gain domain, the value function is concave, producing risk aversion — people prefer the certain gain of saving 200 lives over the gamble. In the loss domain, the value function is convex, producing risk seeking — people prefer to gamble rather than accept the certain loss of 400 lives. The frame determines the reference point (all saved vs. all dead), which determines whether the outcomes are coded as gains or losses, which determines risk attitudes. The options are objectively identical; only the psychological coding differs.
Question 2 True / False
Framing effects are irrational errors that can always be eliminated through education or deliberation.
TTrue
FFalse
Answer: False
While awareness of framing effects can reduce their impact in some cases, they are remarkably robust. They persist among experts (physicians, statisticians), under high stakes, and even when subjects are shown both frames simultaneously. This persistence suggests that framing effects reflect a fundamental feature of human cognition — evaluation relative to reference points — rather than a correctable error. Education can make people more cautious about frame-dependent judgments, but it cannot eliminate the underlying reference-dependent evaluation process.
Question 3 Short Answer
What does the existence of framing effects imply about the concept of 'revealed preferences' in economics?
Think about your answer, then reveal below.
Model answer: Revealed preference theory assumes that choices reveal stable underlying preferences — if you choose A over B, you prefer A. Framing effects undermine this assumption because the same person can choose A over B in one frame and B over A in another, even when A and B are objectively identical options. This means choices do not reliably reveal a single, stable preference ordering — they reveal preferences that are partly constructed by the decision context, including how options are described.
This is a deep challenge for welfare economics and policy analysis. If preferences are frame-dependent, which frame reveals the 'true' preference? There may be no frame-independent preference to discover. Some behavioral economists argue that this means we need new normative criteria — perhaps based on what people would choose after reflective deliberation — rather than simply accepting choices at face value. Others argue that it means we must be very careful about the frames in which choices are presented, because the presentation is not neutral.