Frame Dependence
Categories: Financial Theory
In a nutshell, “frame dependence” means we tend to make decisions on situations based on how those situations are presented, or framed. Said another way, our decisions tend to depend on our frame of reference. Like...if we hate hot weather and sunshine, that’s going to color how we choose our next vacation destination.
In the financial world, if an opportunity is described in terms of how much money it could make, investors tend to act one way. If that same opportunity is described in terms of how much money it could lose, those same investors might act a different way. This is frame dependence, and it’s used in the field of behavioral economics to describe seemingly irrational or otherwise unpredictable investor behavior.