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. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  3. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
  4. Prospect Theory

    A theory that people value gains and losses differently and, ...
  5. Anchoring

    The use of irrelevant information as a reference for evaluating ...
  6. Behaviorist

    1. One who accepts or assumes the theory of behaviorism (behavioral ...
Related Articles
  1. Take the
    Personal Finance

    Take the "Dope" Out of Your Finances

  2. Understanding Investor Behavior
    Active Trading Fundamentals

    Understanding Investor Behavior

  3. Rational Ignorance And Your Money
    Active Trading Fundamentals

    Rational Ignorance And Your Money

  4. Mad Money ... Mad Market?
    Active Trading Fundamentals

    Mad Money ... Mad Market?

Hot Definitions
  1. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  2. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  3. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  4. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  5. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena ...
Trading Center