Do you know how the framing effect in behavioral finance shapes Indian investors’ decisions? Learn through real examples and avoid common investing mistakes.
When it comes to investing, our decisions are rarely purely rational. Even seasoned investors fall prey to subtle psychological traps that influence how we perceive risks and rewards. One of the most fascinating (and dangerous) of these traps is the Framing Effect — a concept identified by two Nobel laureates that continues to shape investor behavior across the globe, including in India.
Let’s dive deep into what the framing effect means, its history, and how it impacts real-world investment decisions — with examples from the Indian financial landscape.
Framing Effect in Behavioral Finance: Lessons for Investors
What is the Framing Effect?
The Framing Effect is a cognitive bias where people make decisions based on how information is presented (“framed”) rather than on the actual facts.
In simple terms — the same information can lead to different decisions depending on whether it’s presented positively or negatively.
For example:
- If a mutual fund advertisement says, “This fund has delivered 90% success rate,” it sounds far more attractive than saying, “This fund failed 10% of the time,” even though both statements mean the same thing.
This framing changes our emotional response and often leads us to make decisions that are not logically consistent.
Who Discovered the Framing Effect?
The framing effect was first identified in 1979 by two Israeli psychologists — Daniel Kahneman and Amos Tversky — in their groundbreaking work on Prospect Theory.
Their research challenged the classical economic assumption that humans are rational actors who always maximize utility. Instead, Kahneman and Tversky showed that our choices depend on how outcomes are framed — as gains or as losses.
For this work, Daniel Kahneman was later awarded the Nobel Prize in Economics (2002), while Tversky (who had passed away earlier) was widely credited as a co-founder of behavioral economics.
Their famous experiment showed that:
- When people were told a treatment had a “90% survival rate,” they overwhelmingly supported it.
- But when told it had a “10% mortality rate,” most opposed it — even though the two statements convey identical data!
That’s the power of framing.
Framing Effect and Investing: How It Impacts Investors
In the investing world, framing influences how we perceive returns, risk, and time horizon. Marketing materials, fund factsheets, and financial media often use framing — sometimes unintentionally — to influence investor behavior.
Let’s understand this through real-world examples.
1. Positive Framing in Mutual Fund Advertising
Mutual funds often highlight absolute returns or short-term outperformance to attract investors.
For example, during 2020–2021 (post-COVID market rally), many funds advertised “1-year returns of 60–70%.”
Technically, those returns were true, but they were framed to create excitement. The reality was that these high returns came after a sharp market crash in March 2020 — a classic base-effect rebound.
Had the same funds shown their 3-year or 5-year rolling returns, the picture would have been much more moderate — around 10–12% per annum.
But because of positive framing, investors rushed in, expecting the same growth to continue.
Source: AMFI data (2021–22) shows a surge in SIP registrations and inflows into small-cap funds immediately after the 2020–21 rally — a clear behavioral response to recent high returns.
2. Risk Framing: “Guaranteed Returns” vs. “Low Volatility”
The term “guaranteed return” creates a psychological comfort. Many traditional Indian investors still prefer fixed deposits (FDs) or LIC endowment policies because these products are framed as safe and guaranteed, even though their real (inflation-adjusted) returns are often low.
In contrast, equity mutual funds are framed as “risky” because of short-term volatility — even though, over long periods (10–15 years), equity has historically beaten inflation and provided superior wealth creation.
This difference in framing affects risk perception.
It’s not that FDs are safer in the long term — it’s just that they are framed to feel safe.
Reference: RBI’s Household Financial Savings data (2023) shows that over 43% of household assets remain in bank deposits, while equity exposure is below 7%, reflecting this deep-rooted framing bias.
3. Tax-Saving Framing – The ELSS Example
Equity Linked Savings Schemes (ELSS) under Section 80C are often framed as tax-saving products, not as long-term wealth creators.
This framing causes investors to:
- Invest only during January–March, just before the financial year ends.
- Redeem immediately after the 3-year lock-in period, ignoring long-term compounding benefits.
Because the product is framed around tax, not wealth creation, the behavior aligns with tax deadlines rather than financial goals.
Data: AMFI reports consistently show seasonal spikes in ELSS inflows during Q4 (Jan–Mar), validating this behavioral pattern.
4. Loss Framing and Panic Selling
During market crashes — such as in March 2020 (COVID) or March 2008 (Global Financial Crisis) — investors saw their portfolio values drop by 30–40%.
Even though these were temporary paper losses, the way news headlines and statements were framed — “Investors lose Rs.10 lakh crore in a day!” — triggered emotional panic.
Many investors sold at the bottom, locking in losses.
Those who framed the same event as a buying opportunity (focusing on future gains) saw their portfolios recover and grow substantially in the following years.
Example: Nifty 50 fell from around 12,000 in March 2020 to 7,500, but recovered to 14,000+ by early 2021. Investors who stayed invested (or bought more) doubled their wealth in less than a year.
How Framing Shapes Indian Investor Psychology
Framing works so effectively because it plays on emotions, social conditioning, and cultural biases.
In India:
- Safety-first framing (FDs, gold, real estate) appeals to traditional savers.
- Tax-saving framing drives short-term investing behavior.
- Return-based framing influences fund selection.
- Media framing during market crashes amplifies fear.
Even regulatory campaigns like “Mutual Funds Sahi Hai” by AMFI have tried to reframe mutual funds as a disciplined, long-term product, rather than a high-risk, stock-market gamble. This campaign has been a huge success in altering perceptions.
Source: AMFI data (as of 2025) shows SIP inflows crossing Rs.22,000 crore per month, up from Rs.8,000 crore in 2018 — a clear sign of changing framing and growing trust.
Overcoming the Framing Effect – How to Think Like a Rational Investor
Understanding the framing effect is the first step toward better decision-making. Here are some practical ways to overcome it:
- Look Beyond the Headline:
Always read the full factsheet or disclosure. Don’t decide based on one-liner advertisements. - Compare Consistent Timeframes:
Use rolling returns or XIRR for 3, 5, or 10 years rather than single-year performance. - Reframe Risk as Time, Not Volatility:
Instead of seeing equity as risky, understand that the risk reduces with time horizon. - Focus on Real Returns:
Evaluate post-tax and post-inflation returns. A “safe” 6% FD might be a negative return in real terms. - Automate to Avoid Emotional Framing:
Use SIPs or STPs to invest systematically and reduce emotional decision-making driven by framing. - Educate and Question:
Before investing, ask: “How is this information framed? What is not being shown here?”
Historical Perspective: How Framing Evolved in India
In the 1990s and early 2000s, most Indian investors viewed mutual funds with skepticism — they were framed as “market-linked and risky.”
Post-2010, with the rise of SIP campaigns, SEBI’s standardization of risk-o-meters, and AMFI’s investor education programs, mutual funds were reframed as disciplined, long-term tools.
Today, the shift from “returns” to “goals” has begun — thanks to advisory-driven investing and SEBI-registered fee-only financial planners (like us at Basunivesh Fee-Only Financial Planners).
We now help clients reframe investment conversations around life goals instead of short-term returns — a crucial step in defeating the framing bias.
Final Thoughts
The Framing Effect reminds us that how we see information often matters more than the information itself.
As investors, our challenge is to recognize when we’re being influenced by presentation rather than substance. Whether it’s a glowing mutual fund ad, a scary market headline, or an enticing tax-saving scheme — always pause and ask: Am I reacting to the frame or the facts?
Investing success lies not just in picking the right funds but also in thinking the right way.