Frame Dependence

AAA

DEFINITION of 'Frame Dependence'

The human tendency to view a scenario differently depending on how it is presented. Frame dependence is based on emotion, not logic, and can explain why people sometimes make irrational choices. For example, when presented with a scenario in which a sweater is being offered at its full price of $50 and a scenario in which the same sweater is regularly priced at $75 but on sale for $50, many consumers would perceive the latter as a better value even though in both situations they are being asked to pay the same price for the same sweater. Thus a real-life application of frame dependence is the use of strategic pricing by retail stores to influence consumers' purchasing behavior.

INVESTOPEDIA EXPLAINS 'Frame Dependence'

Frame dependence is one component of psychologist Daniel Kahneman's Nobel Prize-winning prospect theory, a major contribution to behavioral economics. Along with co-researcher Amos Tversky, Kahneman showed several cognitive biases that cause people to make irrational decisions, including the anchoring effect, loss aversion, mental accounting, the planning fallacy and the illusion of control.

RELATED TERMS
  1. Daniel Kahneman

    A professor emeritus of psychology and public affairs at Princeton ...
  2. Anchoring

    The use of irrelevant information as a reference for evaluating ...
  3. Prospect Theory

    A theory that people value gains and losses differently and, ...
  4. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  5. Behaviorist

    1. One who accepts or assumes the theory of behaviorism (behavioral ...
  6. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
RELATED FAQS
  1. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>
  2. How do I calculate the rule of 72 using Matlab?

    In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>
  3. How do I calculate the standard error using Matlab?

    In statistics, the standard error is the standard deviation of the sampling statistical measure, usually the sample mean. ... Read Full Answer >>
  4. How do I adjust the rule of 72 for higher accuracy?

    The rule of 72 refers to a time value of money formula that investors use to calculate how quickly an investment will double ... Read Full Answer >>
  5. What is the difference between managerial accounting and financial accounting?

    In simple terms, managerial accounting exists to help managers make internal decisions that affect an organization, whereas ... Read Full Answer >>
  6. How does discretionary income relate to autonomous consumption?

    Discretionary income is money that purchases things beyond what one garners through autonomous consumption, which is the ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Take the "Dope" Out of Your Finances

    The activity of the brain chemical dopamine can help make sense of our irrational financial decisions. Here's how to outsmart it.
  2. Active Trading Fundamentals

    Understanding Investor Behavior

    Discover how some strange human tendencies can play out in the market, posing the question: are we really rational?
  3. Active Trading Fundamentals

    Rational Ignorance And Your Money

    It's impossible to know everything about the markets. Find out how ignorance affects your investments.
  4. Active Trading Fundamentals

    Mad Money ... Mad Market?

    Jim Cramer's spirited recommendations are a case study in irrational market behavior.
  5. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  6. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  7. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  8. Economics

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  9. Fundamental Analysis

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.
  10. Economics

    Explaining Demographics

    Demographics is the study and categorization of people based on factors such as income level, education, gender, race, age, and employment.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!