Part II in our Wealth Psychology series: Professor Lisa Kramer explains why we may react differently to financial information depending on how it is delivered. Find out how you can reframe your finances.
Imagine you're in the grocery store, thirsty for a drink and looking for a healthy beverage. One bottle of juice in the fridge reads 95% sugar-free. Another contains 5% sugar. Which sounds healthier? The 95% sugar-free one, right? Of course, they're both the same.
But when it comes to shopping and our finances, the way information is presented can have a big effect on how we perceive it. Behavioral economists call this information framing. The framing effect suggests your brain will process the same information differently depending on whether it's presented as a positive or a negative, or especially a gain versus a loss.
Consider relationships. Wouldn't we all prefer to hear "I love you more than ever" instead of "I used to love you much less?" This applies to money too. Studies have shown that financial losses hurt about twice as much as gains of the same magnitude make us feel happy. This phenomenon, called loss aversion, can affect the way we make decisions. And the outcomes aren't always ideal.
So if you're panicking about an investment that has taken a recent tumble, try taking a deep breath and reframing the situation. For example, has the stock gone up in value since you originally bought it? It's possible for the same investment to be down 10% over the last month in trading and yet remain up 6% over the price you paid for it a year ago. Also, sometimes a second opinion from someone like your advisor can help you make a less emotionally-driven assessment and can offer another perspective.