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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice

Which statement best describes the 'framing effect' in client communication?

The framing effect is when people's decisions change depending on how identical information is presented, for example as a gain or as a loss. It differs from home bias, anchoring and herding, which concern location preference, reference numbers and following the crowd respectively.

  1. ADecisions change depending on how the same information is presented, such as gain versus loss wordingCorrect
  2. BInvestors prefer assets in their own country
  3. CInvestors rely on the first number they see as a reference
  4. DInvestors follow the crowd into popular assets

Explanation

Framing means the presentation of identical information, for example a 90% survival rate versus a 10% mortality rate, alters choices. Preference for domestic assets is home bias, the first-number reliance is anchoring, and crowd following is herding.

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