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. Daniel Kahneman

    A professor emeritus of psychology and public affairs at Princeton ...
  3. Scenario Analysis

    The process of estimating the expected value of a portfolio after ...
  4. Unchanged

    A situation in which the price or rate of a security does not ...
  5. IRS Publication 929: Tax Rules ...

    A document published by the Internal Revenue Service (IRS) that ...
  6. Behavioral Funds

    Definition of behavioral funds.
Related Articles
  1. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  2. 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?
  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. 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 ...
  5. Economics

    5 Nobel Prize-Winning Economic Theories You Should Know About

    Here are 5 prize-winning economic theories that you’ll want to be familiar with.
  6. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  7. 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.
  8. Forex Education

    Trading Multiple Time Frames In FX

    This is often the first - and most costly - level of analysis to be overlooked.
  9. Active Trading Fundamentals

    Behavioral Finance: Introduction

    By Albert PhungAccording to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion ...
  10. Investing Basics

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What will happen to my U.S.-based stock portfolio if the U.S. dollar substantially ...

    The effect of a significant depreciation in the value of the U.S. dollar on the value of an investor's U.S-based portfolio ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center