Anchoring and framing

Two related effects, both about the fact that a judgement depends on how the question arrived, not only on what is being judged.

Anchoring

Presented with a number before making an estimate, people's estimates move toward that number — even when the number is plainly irrelevant, and even when they have been warned.

For investors, three anchors do most of the damage.

The purchase price. Chapter 2's reference point is an anchor, and the most consequential one. The whole of the disposition effect rests on it.

The 52-week high. A stock 30% below its high "has room to recover"; one at its high is "expensive". Neither statement contains information about the business. The high is a fact about the past twelve months of other people's opinions.

A round number. Nifty at 25,000 and Nifty at 24,980 are the same market, but the first generates articles.

Anchoring explains why the first number in any negotiation matters so much. Whoever says a price first has set the region in which the discussion will happen, and the other party's "independent" counter-offer will have been pulled toward it.

Framing

The same situation, described differently, produces different choices.

The canonical investing case is gains versus losses, which connects to the kinked value function of chapter 2. Because losses weigh more heavily, a choice presented as avoiding a loss is taken more seriously than the identical choice presented as securing a gain.

Four framings worth recognising, because you will meet all of them:

Absolute against relative. "Charges only 1.5%" sounds small. "Takes 1.5% of your capital every year regardless of returns, which is roughly a quarter of a 6% real return" is the same charge.

Cumulative against annualised. The worked problem.

Per-period against total. "Just ₹2,000 a month" versus "₹2,40,000 over ten years".

Survivor sets against full sets. "Our equity funds have beaten the index" is a different claim if the funds that did not were merged away.

Where this is done to you deliberately

This is not an abstract hazard. Product marketing is largely the practice of choosing framings.

• Returns quoted over whichever period flatters
• Charges expressed as percentages when small and in rupees when they sound small
• Insurance-linked investments quoting a "sum assured" next to a "maturity value", inviting addition
• Historical performance anchored to a launch date that happens to be a market bottom

Chapter 9 of the Ethics and regulation subject treats the cases where this crosses from persuasion into a prohibited practice. The line exists, and plenty of ordinary marketing sits just inside it.

Working the problem

Why "up 240% since launch" raises more money.

It is a bigger number. 240 against 11.5, and the reader anchors on magnitude before processing units.

It hides the period. 240% might be eleven years at 11.5%, which is respectable and unremarkable; stated cumulatively it reads as exceptional. Cumulative returns grow with time elapsed, so the longest-running product always has the most impressive total, independent of quality.

It defeats comparison. 11.5% a year can be compared with a deposit, an index, inflation, a loan rate. 240% can be compared with nothing the reader has in mind, so there is nothing to check it against.

It anchors the expectation. Having seen 240%, a future year of 8% feels like underperformance even if 8% was always the realistic figure.

A maximally misleading accurate sentence, for instance about an equity fund: "Investors who stayed invested from our launch have more than tripled their money, with no year of negative returns in the last three." Every clause can be true, and together they do four things — select only the investors who stayed, start the clock at launch, pick a three-year window that excludes the drawdown, and omit the annualised figure, the benchmark and the charges. Nothing in it is false. Building one of these yourself is the fastest way to learn to spot them, because you discover the sentence writes itself once you know which facts to leave out.

The defence is conversion to a common unit. Annualised, net of charges, against a stated benchmark, over a period you chose rather than one you were handed. If a seller will not supply that, the refusal is itself informative.

The point

Anchoring means an irrelevant number drags an estimate toward itself — the purchase price, the 52-week high, a round index level — and framing means the same fact described differently produces different decisions, because losses weigh more than equivalent gains. Both are used deliberately in selling financial products, most commonly by quoting cumulative rather than annualised returns, since a cumulative figure grows with elapsed time and cannot be compared with anything the reader already knows. The defence is to restate every claim as an annual rate, net of charges, against a benchmark, over a period you picked.