Decision Making: Framing Risk and Opportunity

From the lecture series: The Art of Critical Decision Making

By Michael A. Roberto, DBABryant University

Could the way that we present and define a problem for people shape the solution that they select? Does the way that a leader frame a problem narrow the range of alternatives that their advisors might consider and discuss?

risk framing concept
(Image: bleakstar/Shutterstock)

Frames are mental models that we use to simplify our understanding of the complex world around us. In other words, frames are mental models that help us make sense of the world around us.

Distortions in situations and conversations can occur based on how problems are framed or defined for us. Moreover, there is a relationship between how we frame problems and the level of risk that we take.

What is a frame? Frames are mental models that we use to simplify our understanding of the complex world around us. In other words, frames are mental models that help us make sense of the world. They involve our assumptions—often taken-for-granted assumptions—about how things work. How we frame a problem often shapes the solution at which we arrive. Think for a moment about how economists think about choice, as economists have fairly sophisticated models of how people make decisions. In particular, they’re interested in the decisions we make about purchasing goods, for example.

For years, economists believed that we estimate expected values when confronted with risky situations and that framing the situation in one way or the other shouldn’t matter. Economists would argue that we weigh different possible outcomes with probabilities. When faced with a risky situation, we then determine what the expected value will be. In other words, we take the probability of outcome A times the result of outcome A, plus the probability of outcome B, times the result of outcome B, and that yields some expected value. Most of us are slightly risk-averse, meaning we would rather take an amount slightly less than that expected value if it was given to us with certainty, rather than take the risk of a high or low outcome. We like that certainty equivalent rather than the gamble—most of us, not all of us; some of us love risk. 

Risk-Avoidance vs. Risk-Seeking

In the field of business, we perceive entrepreneurs as those who enjoy taking risks, and are more risk-seeking than the average person; they’re tolerant of the fact that they’re going to face a lot of ambiguity that they might fail. Most entrepreneurial ventures do fail and most entrepreneurs go into it understanding that.

Economists for many years didn’t believe that how we framed a situation—the language we used in presenting a problem to someone—didn’t impact the decision-making we would undertake in risky situations. It turns out that wasn’t correct. Amos Tversky and Daniel Kahneman, two expert psychologists in decision-making, put forth an interesting theory some years ago: They called it prospect theory and it suggests that framing matters. In fact, even small changes in wording have a substantial effect on our propensity to take risks. According to prospect theory, framing matters a great deal, and if we frame a situation in terms of a potential gain, we act differently than if we frame it in terms of a potential loss. This notion of loss versus gain turns out to have a great impact on our risk-seeking or risk aversion. Tversky and Kahneman argue that framing situations in terms of a loss is what causes us to take more risks than if we were to frame it in terms of a potential gain.

 value function in prospect theory.
The shape of the value function in Tversky and Kahneman’s prospect theory. (Image: Rieger/Public domain)

How did they demonstrate this? Interestingly, they conducted some experiments that you can walk through on your own.

Read through the scenario and then answer genuinely, as the subjects in Tversky and Kahneman’s experiments were asked to answer: Imagine that the United States is preparing for the outbreak of an unusual Asian disease that is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program is as follows: If program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no one will be saved. Which of these two programs do you favor?

Take a mental note of which program, A or B, that you favor. Write down which you prefer, because we are going to consider a second scenario, and compare the two answers you give.

This is a transcript from the video series The Art of Critical Decision Making. Watch it now, on Wondrium.

Scenario two: Once again, imagine that the United States is preparing for the outbreak of an unusual Asian disease expected to kill 600 people. Again, we have two alternative programs to combat the disease, and assume again that we know the exact scientific estimates of the consequences of these two programs. In this case, we have program C and program D. If program C is adopted, 400 people will die; we know that with certainty. If program D is adopted, there is a one-third probability that nobody will die; however, there’s a two-thirds probability that 600 people will die. In comparing programs C and D, which of these two programs do you favor? Make a mental note of your response to which program you favor.

According to prospect theory, framing does matter a great deal, and if we frame a situation in terms of a potential gain, we act differently than if we frame it in terms of a potential loss.

Think about your responses. What happens when this is done with a large group of subjects? Here’s what Tversky and Kahneman found: Concerning problem number one, comparing programs A and B, people tend to be risk-averse. The average person, at least in their response, tends to be risk-averse. In problem two, people exhibit risk-taking tendencies. What’s going on there? The two situations are identical; the only difference is that the first problem focuses on the number of lives that can be saved, while the second one focuses on the number of lives that can be lost. What happens is, when we frame it in terms of a loss, we see people engaging in risk-seeking or risk-taking behavior. When we frame it in terms of a gain, people are much more risk-averse—on average, but not everyone.

The point is, people flip from risk aversion to risk-seeking behavior just because the problem is defined differently. The phenomenon is interesting because most studies found that people are largely consistent: They either tend to be, in terms of their personality and character, sort of risk-averse or not. That was the common wisdom, but here, Tversky and Kahneman have shown us that language matters: How we define the problem actually dictates the choices that we make, and this is an amazing conclusion. Small changes in wording matter a great deal—language matters. Definition of problems dictates, or at least drives towards, the kind of solutions we come up with, concerning those problems.

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Prospect Theory in War

two helicopters flying low over the rice paddies of South Vietnam looking for Viet Cong insurgents during the Tet Offensive in 1968. (Artist's Impression)
The Vietnam War can be seen as a classic case of escalation due to sunk-cost effect. (Image: Keith Tarrier/Shutterstock)

In economics, the sunk-cost effect—the cost that has been invested and cannot be recovered—and the escalation of commitment principle—where the course of action is continued, despite the increase of a negative outcome—can help us to understand this switch between risk-taking and risk aversion. Prospect theory may be one explanation for the escalation of commitment that occurs when there are high sunk costs.

Let’s take an example. Tragically, the Vietnam War may be an example of the escalation of commitment. As you might have read about in the history books, the Vietnam War was not an instance where America went in completely into a war all at once. Instead, the US sort of dipped its toe in. We began by sending advisors to South Vietnam; then we started to introduce troops into combat there, and over time, we added more and more troops and escalated our commitment. We gradually kept increasing our involvement, despite a series of very poor results. One would argue, drawing on prospect theory, that perhaps we kept pouring more resources into the war because we framed the situation in terms of a loss. Thus, we had a propensity to take more risks to try to dig out of the loss position.

It was this mindset that applied domino theory to the situation: that if we lost the country of South Vietnam to communism, then other nation-states in South Asia and East Asia might fall like dominos to Soviet expansionism into communism. We had framed this as a potential loss, and perhaps that led us to take many risks and to escalate our commitment to what was a failing course of action.

That framing of the situation as a loss began at the war’s outset, when the invasion of Vietnam was marketed to the American people and the president as “we don’t want to lose South Vietnam to the communists.” It wasn’t about gaining a victory to accomplish objectives; it was a defensive posture that belied American worries about the threat of Soviet expansion. America didn’t want to see communism run rampant in various parts of the world; the response was to draw a line in the sand and avoid the loss of another nation-state—another region—to communism. It was this mindset that applied domino theory to the situation: that if we lost the country of South Vietnam to communism, then other nation-states in South Asia and East Asia might fall like dominos to Soviet expansionism into communism. We had framed this as a potential loss, and perhaps that led us to take many risks and to escalate our commitment to what was a failing course of action—a very sad circumstance where prospect theory might help us explain the behavior of our leaders in that case.

From this early body of work, largely laboratory studies looking at framing and its impact on decision-making, we have management scholars who extended the research by arguing that we act differently when situations are framed as opportunities versus threats. Now, they’re making an interesting dichotomy, and in the field of management and business, we often do think about what might happen to the firm, as there may be a threat coming from the external environment from a competitor, a regulatory change, a change or shift in consumer tastes, or, there might be an opportunity.

Framing Change as Opportunity

Dark chocolate stack, chips and powder
A chocolate manufacturer can treat the trend towards healthy living as both a threat and an opportunity. (Image: Fortyforks/Shutterstock)

If you’re a chocolate manufacturer, all of this emphasis on health and wellness might be framed as a serious threat: People are worried about obesity, and they’re going to consume less candy and chocolate. This thinking could harm our business, or, that same issue of health and wellness could be framed as an opportunity. There’s some scientific research showing that, for example, there are some health benefits to dark chocolate. As a management team, you might look at the health and wellness trend and decide it is an opportunity for the company to bring out a line of products that have some health benefits that play into this trend and this growing consumer preference. The notion that managers are frequently framing things in terms of this dichotomy of opportunities and threats seems quite real.

Organizations act very rigidly when they’re faced with threats, and they act much more flexibly and adaptively if they frame those same situations as opportunities.

According to this theory, organizations act very rigidly when they’re faced with threats, and they act much more flexibly and adaptively if they frame those same situations as opportunities—very different behavior depending on how they’ve defined the problem and the situation. In particular, scholars have argued that we tend to simply “try harder” using well-established routines and procedures when we frame something as a threat. However, we may not think differently or find new ways of working effectively if we frame it as a threat. We may be doing more of what already got us in trouble in the first place. That’s threat rigidity, and it can be a real problem.

Learn more about three cognitive biases that play a role in bad decision making:

Adaptability as a Framework for Growth

This work has been extended by various scholars who began to dig into this in more detail. One of those scholars is named Clark Gilbert, a former colleague of mine at the Harvard Business School. He was doing his graduate work in the field of management around the time the web started to take off, and he became interested in what was going on in the newspaper industry. Since the ubiquitous expansion of the web, the newspaper industry has been seriously disrupted by it. Circulations are down across the United States and advertising revenue has dried up dramatically with the emergence of services like Craigslist,, and all sorts of other online advertising avenues like Google search ads, et cetera.

Gilbert became very interested in how traditional newspapers would react to the emergence of the web. He considered if it might matter how they frame the situation, how they define what is going on concerning the web. His work suggests that framing a situation as a threat may actually have some usefulness. Why? Because if we frame it as a threat, we may allocate more resources to the problem; it may wake us up and say that we have to do something. But we might need to frame it as an opportunity to use those resources effectively because framing as an opportunity leads to more divergent thinking, less rigidity in our behavior, and more openness to new ideas. In other words, what Gilbert is saying is not as simple as opportunity framing is better than threat framing. What the best organizations do is balance two competing frames, and this is what he looked at in the context of the newspaper industry and its response to the Internet. His study found that those newspapers who exclusively examine the web as a threat responded by pouring dollars at their websites. However, they tended to replicate their hard copy online. Their paper copy became a PDF that was posted on a URL, on a website that people could download and read. It was a use of the technology that bore a striking resemblance to what already existed and was not fully taking advantage of what the web had to offer.

Those who framed it as an opportunity did respond more adaptively, but they didn’t necessarily allocate enough resources to the situation to implement their strategy as well. Here’s what those organizations did. They, by framing it as an opportunity, saw the web as a chance to do things you can’t do with a hard copy of a newspaper that gets dropped at someone’s door at 6 am. These are the kinds of organizations (those who framed it as an opportunity) who started blogs, podcasts, who had forums for discussion and bulletin boards—who started doing things with their website that they couldn’t do with their hard copy. This was much more divergent thinking, more creative, more open to new ideas—so there are the benefits of the opportunity framing, but they didn’t allocate enough resources to fully capitalize on the technology and the opportunity. The most effective organizations in the study initially assessed the web as a threat, and in response to that they woke up—they jostled the organization out of its slumber and poured some resources at it. They often set up a separate organization, a unit that was told to get this thing, study it, figure out what’s going on, but then they quickly reframed the web as an opportunity with the web. The web wasn’t going to just destroy the business, but it might be an opportunity to grow new streams of revenue and to do exciting new things. The best organizations were able to manage these competing frames. It’s an interesting body of work that’s shown us not just the power of framing, but how we might use framing to our advantage as leaders in organizations.

Reframing Crisis Post 9/11

Framing is a general phenomenon, not just a binary thing. It is not always about A versus B, threat versus opportunity, loss versus gain. We have always adopted mental models that shape our way of looking at situations. However, those mental models sometimes become outdated. Let’s take the case of the September 11 terrorist attacks. What the 9/11 Commission found in their report on these attacks is that many government agencies were still operating, in 2001, with a “Cold War” mindset. The Cold War mindset viewed threats as emanating primarily from other nation-states. The Cold War frame emphasized conventional warfare and arming ourselves to protect against military attacks by the armies of other nations. The various arms of the federal government were all still organized based on this Cold War model of national security. They weren’t organized to defend against these so-called asymmetric threats: threats that came from things other than nation-states or conventional armies; threats that involved networks of people in various places—not world leaders of countries; threats that involved different methods of attacking people—not attacking their armies, but perhaps attacking its civilians. The government and its various agencies were not organized for this new warfare. Their mental model caused them—because they were in that Cold War mindset—to be predisposed to a very different set of defensive tactics than were called for to be prepared to defend against something like the terrorist attacks of 9/11. What we see is a mindset that worked well for 40 or 50 years after World War II became outdated. New kinds of issues arose in the environment, new kinds of threats arose, and a certain model to frame the world in still persisted in the organization in its culture and structure. This meant that when new threats and new things emerged, they operated by an old model.

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The Federal Aviation Administration (FAA) also had this type of issue as they experienced the 9/11 terrorist attacks. The FAA had developed a lot of procedures to try to promote and preserve aviation security. Many of those procedures were born during the ’60s and ’70s, during a time when there were two main concerns to aviation security. One was a hijacking, of course, of which there had been several prominent hijackings, particularly in the 1970s. The second threat of concern was someone somehow putting a bomb in checked luggage, detonating it in the cargo bay of a plane, and taking it from the sky. They didn’t consider at all the notion of someone being a suicide bomber on a plane, killing themselves, and taking the plane down with them. Their frame, their whole model of security, was based on the fact that they had this deep experience in an era in the ’70s where hijackings and bombings were the norm for terrorists. Again, people were caught in a way of framing the situation and a certain mental model that can become outdated and hard to shake.

Assumptions and Mental Models

General Motors logo
General Motors was the largest and most profitable company in the world in 1972. (Image: Gage (talk) – Source: 2007_business_choice_bro_en.pdf (on GM website)/Public domain)

Speaking of hard to shake mental models, mental models ultimately come down to our taken-for-granted assumptions about how the world works. These assumptions can easily get outdated, and yet, we don’t make them explicit and challenge them in our organizations.

Consider this question: What was the most successful (the largest and most profitable) company in the world in 1972? General Motors. GM, with more than 50 percent market share in the United States in the automobile market, incredible profits, and revenue growing every year, was on top of the world. USC Professor James O’Toole once identified the core assumptions of the management team at GM in the 1970s, when they were on top of the world. He developed a list of the 10 fundamental shared basic assumptions at GM, c. 1972. It’s a bit of a stylized list, it may be a little extreme. and some of the managers there would quibble with some of these, but it’s illustrative. He said,

  1. GM is in the business of making money, not cars. In his belief, that was one of the fundamental shared basic assumptions, one of the fundamental facets of the mental model-driving behavior and decision-making at GM.
  2. Success comes not from technological leadership but from being able to quickly adopt innovations successfully introduced by others.
  3. Cars are primarily status symbols. Styling is, therefore, more important than quality to customers, who, after all, are going to trade up every other year anyway. That was the model in the automobile industry in the ’60s and ’70s: Get people to trade up as incomes rose in the post-World War II era.
  4. The U.S. car market is isolated from the rest of the world. Foreign competitors will never gain more than 15 percent of our domestic market.
  5. Energy will always be abundant and cheap—note in 1972, this was just before the first OPEC embargo, the first dramatic spike in oil prices that occurred during the 1970s.
  6. Workers have no important impact on production or product quality—that’s the purview of inspectors, of engineers.
  7. Consumer, environmental, and other social concerns are unimportant to the U.S. public.
  8. The government is the enemy. It should be fought tooth and nail every inch of the way.
  9. Strict, centralized financial controls are the secret to good administration.
  10. Managers should always be developed from the inside; managers should be promoted from within.

Those were the 10 assumptions O’Toole identified in looking back at the management team at GM and their mental model in 1972. His analysis suggested GM was unable to recognize how and when these assumptions had become outdated. Many of them became outdated in 1973, like the assumption about energy prices. Some took more years, even a decade or more, to fundamentally become flawed and outdated. When the threat of Japanese imports steadily began to build steam during the 1970s and early ’80s, General Motors at first dismissed it. Then they framed it primarily as a threat, and they acted rigidly in response. It’s interesting to watch how calcified mental models can become—how difficult it can be for a team to shake itself from that model and frame of a situation. That becomes even harder when there’s very little turnover in that management team, when everyone has worked in the industry for a long time, and in that particular company for a long time. That lack of exposure to other ideas and outside perspectives makes it difficult to frame the problem in a way other than how it has previously been framed by a particular organization and its leaders.

In some situations, leaders might want to hold back on offering their assessment of a situation, because their framing of a situation may constrict the range of advice and the range of options brought forth by their team. That’s an important lesson about framing that every leader should heed.

Framing in Leadership

How can we improve the way we frame things, and what should we as individuals do about the fact that framing can have such a powerful effect on our decision-making?

First, leaders need to be careful about imposing their frame on their management team. In some situations, leaders might want to hold back on offering their assessment of a situation because their framing of a situation may constrict the range of advice and the range of options brought forth by their team. That’s an important lesson about framing every leader should heed.

Jack Welch in 2012
GE achieved great success during Jack Welch’s tenure as its CEO. (Image: Hamilton83/Public domain)

How else can we improve the way we frame? We should consider adopting multiple frames or multiple definitions of any particular situation. In other words, we ought to define our problems in several different ways—some more broad than others—because each definition naturally tilts us toward one kind of solution or one range of options. We need to think about our metaphors, too. We use them all the time. We make metaphors in our speech and in the way we describe situations to others. Those metaphors are very powerful, but metaphors can also constrict our thinking; they’re part of how we frame problems and situations. We need to surface our implicit assumptions—what are those taken-for-granted assumptions that are part of these mental models that we take around with us? We need to probe, validate, and test those very carefully.

Finally, we need to think about the reference points and yardsticks that we use when we define problems. Let me give you an example. Before Jack Welch becoming CEO of General Electric in 1981, GE looked at each of its business units and said: Is it growing its revenue, is it growing its profit, and how is it doing relative to last year? Is it doing better? If it’s doing better than last year then that’s a good thing. If it’s doing worse, then that’s a bad thing, and that’s a basic way of looking at their businesses. Welch took over and said we need a different reference point and a different yardstick because GE was comparing itself to past variables, without considering Japanese competitors and other challenges coming in the market. This inward focus and self-comparison was harming the company. So Welch established new reference points and yardsticks by determining that GE should be number one or number two in the markets it served; if the company wasn’t number one or number two, they ought to fix it, sell it, or shut it down. All of a sudden the benchmark, the yardstick, the reference point became how they were doing relative to their competitors. It no longer became an internal reference point. He’s provided a wholely different frame on the performance of his business units, and in so doing, he unlocked all kinds of opportunities for the company. They did divest some units and they shut some things down, but they also realized what their real gems were, and they grew those businesses very aggressively. Welch and GE went on to great success during his two-decade tenure at the company.

Multiple Models and Reality to Make Decisions

We have to remember throughout this that frames are models. Models are, by definition, simplified abstractions of reality. These models aren’t “right” in the sense that they don’t capture all the complexities of reality, but they can be useful to us. They help us cope with all the complexity and ambiguity in the world. They help us make decisions, but we have to be careful of oversimplification, one of the things that we often do.

Through it all, we have to remember this notion that we will be better off if we have competing frames and multiple ways of defining the problems we face. It helps us to avoid forcing ourselves down one path under the definition of the problem or situation that we first encountered. F. Scott Fitzgerald, the author of The Great Gatsby, once said, “The test of a first-rate intelligence is the ability to hold two opposite ideas in mind at the same time and still retain the ability to function.” The ability to hold the power of competing frames at once is possible. I think the ability to hold those multiple frames in our mind and not allow one definition of a situation to constrict the range of options we consider is absolutely critical.

Our cognitive limitations can distort our decisionmaking, but don’t misunderstand that it seems like we always get it wrong, due to bounded rationality, that we always fall into traps. We want to understand the power of the human mind—and particularly, the power of intuition. It doesn’t require tons of formal analysis to get the right answer to tough problems. We can use our instincts, and our instincts are often correct.

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Common Questions About Framing Risk

Q: What is framing in decision making?

Framing is a tool employed by marketers. It relies on the fact that people will take different actions based on the same set of information, depending on whether the information is framed in a positive or negative light.

Q: Why is the framing effect important?

When information is provided in a favorable light, emphasizing the gains rather than the losses, people are more likely to avoid risks. Conversely, if the losses are emphasized, people will be inclined to take a risk to avoid the loss, even if the information is exactly the same.

Q: What is an example of framing in psychology?

The framing effect was introduced in psychology based on a study by Amos Tversky and Daniel Kahnemann. The study demonstrated that in advertising, people will react differently to a product based on how it is framed. For instance, customers will have a more positive perception of a shampoo advertised as having 90 percent natural ingredients than a shampoo that’s stated as having 10 percent artificial ingredients, even though both add up to the same outcome.

Q: What is framing a question?

Framing a question means setting up a question in a way that is intended to get the type of answer you are looking for.

This article was updated on July 22, 2020

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