Definition of narrow framing

In finance, an investor is said to suffer from narrow framing if he seems to make investment decisions without considering the context of his total portfolio.

“Framing” refers to the context in which a decision is made, or the context in which a decision is placed in order to influence that decision. For example, a gambler might readily spend $500 won at the casino on an expensive meal, reasoning that the $500 is “free” money, while he would not be willing to spend $500 of earnings from his job on such a meal. Similarly, a merchant can mark a product as priced at $100 dollars but on sale for only $60 dollars to foster the impression that the product is a bargain at $60. Thus, the context in which the decision maker sets his decision affects the outcome, and others can attempt to manipulate that context for their own benefit.

A narrow-framing investor may ignore and, therefore, squander the potential benefits of diversification given his myopic approach to decision making.   These investors may also be subject to marketing pitches regarding specific, seemingly attractive investments.

Academic researchers measure an individual’s degree of narrow framing with trade clustering.  That is, if an investor trades an individual stock now and then, he may be guilty of narrow framing. This contrasts with investors who trade several or many assets at the same time, as if they recognize that they are rearranging a portfolio of assets. Research shows that individuals identified as narrow framers also make other mistakes with their portfolios and typically experience relatively poor portfolio performance.


Example

An investor may get excited about the shares of a particular tech stock and purchase that stock without recognizing that his portfolio is already overweight in tech stocks.  An analogy would be buying a new car without considering whether it fits in the garage, whether it is large enough to carry the entire family, or whether its fuel efficiency is appropriate for the buyer’s income. [1]

FT Articles & Analysis

No articles are associated with this term

Related Terms

No related terms are available