Blog 63: Framing Effect by Xavier Lo, FIA, FRM, MBA

Behavioural economics [行為經濟學] is a subject that I really enjoy reading about, and something I’ll write about regularly. We will touch on one small part of it today: the Framing Effect [框架效應].

Lets start with a thought experiment. Say you were given a goal to study hard for your actuarial exams [精算試] for 10 hours a day for 1 week. At the end of the week, if you’re able to meet this goal, I’ll pay you $1,000. Would you do it? Maybe. How about if I gave you $1,000 at the start of the week, and then said you’ll have to give it all back to me if you don’t meet the goal. In which scenario do you think you will study the hardest? Probably the second one. Another experiment is one where you want to buy a new smartphone [智能手機] for $600. One shop offers a 20% discount off [八折] the smartphone, and another one offers $120 off. Try to picture these offers and marketing posters in your head and see which one you’ll pick – again, probably the second one.

What’s happening here? Basically, our brains are not perfectly logical [合乎邏輯]. We do get affected by how situations and words are presented to us. In general, we hate losses, and are attracted to large, whole-rounded numbers. We can use this to our advantage when we think about product designs. For example, it sounds much more attractive when you offer a 90% discount off the first year premium of a life insurance product [人壽保], rather than a 9% discount for the first 10 years. Or, you could say your travel insurance product [旅遊保] offers overseas coverage to customers for over 190 countries! But what you’ll then realise is that most people only travel to at most a handful of countries per year.

Although we like to think of ourselves as perfectly logical beings, we actuaries are still humans after all, and are definitely susceptible to the Framing Effect. So I think there are two lessons here today: don’t let it affect your logical judgement, but at the same time, try to use it to your advantage when trying to attract other people/customers!

Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.

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