Frame Dependence

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.

BREAKING DOWN '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. Homo Economicus

    A term that describes the rational human being assumed by some ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  3. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  4. Regret Avoidance

    A theory of investor behavior that attempts to explain why investors ...
  5. Daniel Kahneman

    A professor emeritus of psychology and public affairs at Princeton ...
  6. Prospect Theory

    A theory that people value gains and losses differently and, ...
Related Articles
  1. Term

    International Trade Fuels the Global Economy

    International trade is the exchange of goods and services between countries.
  2. Active Trading Fundamentals

    Behavioral Finance: Conclusion

    By Albert PhungWhether it's mental accounting, irrelevant anchoring or just following the herd, chances are we've all been guilty of at least some of the biases and irrational behavior highlighted ...
  3. Active Trading Fundamentals

    Behavioral Finance: Background

    By Albert PhungBefore we go over the specific concepts behind behavioral finance, let's take a more general look at this branch of finance. In this section, we'll examine how it compares to conventional ...
  4. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  5. Investing

    7 Ways Your Emotions Skew Your Business Decisions

    Important decisions such as making a key investment, increasing production or expanding into new lines are all clouded by human emotion. Can you stay cool under pressure?
  6. Active Trading Fundamentals

    Behavioral Finance: Key Concepts - Prospect Theory

    By Albert PhungKey Concept No.8: Prospect Theory Traditionally, it is believed the net effect of the gains and losses involved with each choice are combined to present an overall evaluation of ...
  7. Forex

    Multiple Time Frames

    Using multiple time frame analysis can drastically improve the odds of making a successful trade.
  8. Investing

    9 Cognitive Biases That Affect Your Business

    Human beings often act irrationally when it comes to business decisions. Behavioral finance explains the difference between what we should do and what we do.
  9. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  10. 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?
RELATED FAQS
  1. Why does inflation increase with GDP growth?

    Examine the relationship between inflation and GDP, and why GDP growth leads to higher prices. Explore the effects of uncontrolled ... Read Answer >>
  2. How does behavioral economics treat risk aversion?

    Learn about the relationship between decision-making and risk, as described by one of the foundational theories in behavioral ... Read Answer >>
  3. Are we in a bull market or a bear market?

    A bull market is represented by a rising price trend, and a bear market is indicated by a falling price trend. Given this ... Read Answer >>
  4. Does the law of demand in economics describe real human behavior?

    Learn how the law of demand can be used to describe human nature, even if it cannot always produce accurate predictions about ... Read Answer >>
  5. Why is the Ultimate Oscillator important for traders and analysts?

    Understand the thinking behind the design of the ultimate oscillator and learn the primary trading signals that it generates ... Read Answer >>
  6. I don't understand how a stock has a trading price of 5.97, but when I buy it I have ...

    It might seem logical that the last traded price of a security is the price at which it would currently be trading, but this ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center