Let’s first look at the story of a credit card when it was just born.
When credit cards first became popular in the United States, there were lawsuits between card issuers and retailers. At issue is whether merchants should charge higher prices or surcharges for consumers who use credit cards. This is because the merchant pays the card issuer a transaction processing fee. Therefore, merchants naturally hope that the money will be paid by consumers.
But the credit card institutions quit, and they have to spend more money. If they do this, who still uses credit cards? They require that the two kinds of consumption must have the same price.
What should we do? Later, the card issuer changed their thinking, not focusing on the content, but on the form.
If a merchant must charge a different price, the "regular price" is the price charged to credit card users, while cash users get a discount.
There is also a price difference, but both merchants and consumers are very satisfied, at least on the surface, the price is the same.
This is actually taking advantage of people's framing effect.
What is a narrow frame?
The frame can be imagined as the viewfinder frame of the camera when taking pictures. Since the lens of the viewfinder frame has only a limited angle, where the frame is set, what we see is only the scenery presented in the frame.
Therefore, it is a narrow frame to describe that people do not have a global view when making decisions.
According to traditional financial theory, rational people do not have a viewfinder, and their vision is global. In reality, when people make decisions, they will be affected by the frame, which is the frame effect.
How exactly do framing effects affect people's decision-making in financial markets?
In order to better observe the financial market, let's first try to draw a picture in our mind.
A three-dimensional financial market has two dimensions:
· One is the cross-sectional dimension, which refers to the observation of many investment products in the market at a point in time.
The other is the time series dimension, which refers to fixing an investment object and seeing its performance at different time points.
Let's look at the impact of a narrow framework in this dimension.
Rational Investing in the Cross Section: Portfolio Theory
Let's first look at what rational decision-making should look like on a cross-section, and then understand the difference in decision-making when there is a narrow framework.
You must have heard the saying "don't put all your eggs in one basket" right?
In investment, it means "don't invest all your money in the same object", and you should diversify your investment. This is the most important theory of rational investment decision-making - portfolio theory.
What should be the best combination of investments?
Let's take stock investment as an example. If you find one of the best stocks in the world, you now know you can't put all your money into it. Because if the price goes up you make money, but if the price goes down you lose money, it's too risky.
To reduce risk, you decide to buy another stock.
So, in order to diversify risks, should you buy a stock whose price fluctuates in the same or opposite direction as the previous one?
It should be the opposite.
Therefore, it is less risky to combine two stocks that move in opposite directions than to combine the first best stock with the second best stock in the same direction.
This is what portfolio theory is all about.
A combination of two stocks is not as effective in dispersing risks as a combination of three stocks, and a combination of three stocks is not as effective in dispersing risks as a combination of four stocks...and so on.
Therefore, when the number of stocks in the portfolio is quite large, the fluctuation of a single stock is no longer important, because it has been completely offset by other stocks with opposite fluctuations.
Therefore, it is no longer the fluctuation of a single stock that determines the risk of the entire portfolio, but the correlation between the stock and other stocks.
Having said so much, just to illustrate one point, rational people don't care about the ups and downs of a single asset. The reason is simple, the volatility of a single asset will be balanced by other assets and has no effect on risk.
Rational investors only care about whether the synergistic changes between assets have changed, rather than checking the rise and fall of individual assets.
Narrow framing in cross-section: Looking at the ups and downs of individual investments
But, in real life, do people do this?
no. Because of the narrow framework, people don't have a holistic view when investing. Just like a blind man touching an elephant, everyone touches a small part and starts to make decisions.
For example, most people understand that they need to invest in a portfolio and diversify their risks. So I bought a lot of eggs and put them in the basket.
But people never pay attention to the ups and downs of this combination, but pay attention to each egg, and check one by one whether the individual self-selected stocks have fallen or risen.
This most common daily operation is actually wrong!
As mentioned above, rational people should choose assets with different fluctuation directions to combine. In this way, the rise and fall of a single self-selected stock will be balanced by the fluctuations of other stocks, which will have no impact on the risk. However, investors always mistakenly regard the rise and fall of individual stocks as risk.
When stocks go up and down, investors will pay attention to the changes in the ups and downs relative to the reference point, such as cost price, recent high point, low point, etc., which will affect decision-making.
If it falls, you will be risk-loving and hold it for a long time; if it rises, you will be risk-averse and sell prematurely.
The mistake of viewing self-selected stocks one by one is that they lack a holistic view when investing, are limited by the narrow framework of a single asset, do not view assets as a portfolio, and mistakenly regard the rise and fall of a single asset as a risk.
What is the correct way to do it?
We should stand on the overall situation, examine the direction and magnitude of the coordinated fluctuations among the entire portfolio assets, and operate according to this, rather than according to the rise and fall of individual stocks.
Rational Investment in Time Series: Unclear Assets
Let's look at investment from another dimension, time series.
Assets are constantly rising and falling, how often should assets be counted to determine profit and loss?
The rational answer is: don't count!
This may challenge the perception of many people.
Can't you take stock of your assets? Shouldn't you know your own profit and loss?
Rational people's investment only looks forward, looking in the direction of the future, and will not be affected by the past, and will not rely on reference points.
Narrow Frame on Time Series: Frequent Asset Inventory
Frequent inventory of assets is a narrow framework on time series.
The main problem for investors to count assets is that their purpose of counting is to understand the profit and loss, and to understand the profit and loss is to look back, so that investment decisions are easily affected by the reference point and make mistakes.
Individual investors often take stock of their assets on a daily basis. Taking inventory of assets on a daily basis is actually calibrating with reference points every day. This greatly increases the impact of the reference point effect on investment decisions.
Although institutional investors do not operate as frequently as individual investors, they still have to count their assets. For companies and funds, due to the requirement to disclose quarterly reports, assets should be counted at least once a quarter. Inventory assets may also cause unnecessary operations due to the influence of reference points.
In fact, the main problem with inventorying assets is that profits and losses are calculated unconsciously, leading to "looking back" in investment decisions.
How to avoid "looking back"?
Suppose you bought a stock for 30 yuan and decided to sell it when it rose to 60 yuan. Now the stock price is 55 yuan, what should you do? Is it full? Short position? Half position or other positions?
Do you find it difficult to make decisions?
Why do you find it difficult? It is because you are "looking back", and you can never forget the reference point of 30 yuan. Forget about this point of reference for now, "look ahead" and decision making will be easier.
You try to do this: you see a stock now, the price is 55 yuan, and the target price is 60 yuan.
For such a stock, how many positions are you willing to allocate?
You might say, then at most 10% of the position should be allocated. Then, please sell 90% of your position!
Is not it simple?
So, inventorying assets is not a problem, the problem is to get rid of the influence of reference points. Freed from reference points, investing should be "forward looking".
Well, this is the framing effect of investment, and let's go back to the story of the credit card at the beginning.
In fact, for shopkeepers and consumers, there is no difference between a discount and an additional surcharge, but people are more willing to accept this form of discount.
What is a Mental Account?
Mental accounts are relative to real accounts.
When people make decisions, they have a real account, which records the real profit and loss; at the same time, people also create an account psychologically.
The mental account has a certain relationship with the real account. It will change with the real account, but it is not completely equal.
Let's first use a classic example to feel it.
In the first case, you spent 1,500 yuan to buy a ticket for a concert. On the way there, you found that the ticket was lost. The ticket office is still selling tickets at this time. Would you buy another one?
In the second case, you go to a concert and plan to buy a ticket on the spot, and the ticket price is 1,500 yuan. However, you lost 1,500 yuan on the way there. If you still have enough money, would you continue to buy tickets to the concert?
Do you choose to go home if you lose your ticket, but if you lose your money, you will continue to listen?
Why is this so?
From the perspective of traditional finance, the two situations are the same, and the real account of the person is 1,500 yuan less. But studies have shown that most people will decide to go home after losing their tickets, but they will decide to continue buying tickets when they lose their money.
This difference in behavior can be explained by mental accounting.
Decision makers have many mental accounts, which are kept separately. In the psychological account of the concert, the enjoyment value of listening to the concert is equivalent to its ticket price of 1,500 yuan.
In the first case, if you lose the ticket and buy another ticket, the mental account will feel that the cost of the concert has become 3,000 yuan, which exceeds the enjoyment brought by listening to the concert, so you may not want to buy another ticket up.
In the second case, the loss of 1,500 yuan was placed in the psychological account of cash, and was not associated with the mental account of the concert. Therefore, losing money will not affect your decision to go to a concert.
This shows that decision-making behavior is not affected by real accounts, but by psychological accounts.
Moreover, it is very important for investors that there are many mental accounts of people, which are separated from each other, and people do not consider the correlation between them when making decisions.
The Influence of Mental Accounts on Investment Decision-Making
Recall your or your friend's investment method, will you divide the money into several parts, invest part in relatively safe assets, such as depositing in a bank; and part in risky assets, such as buying stocks.
Then manage these two assets in two mental accounts. One wants to avoid poverty and guarantee a basic life, while the other wants to get rich.
But in the scenario assumed by traditional economics, a rational person would not do this. His decision-making has no mental account, all assets are a unified real account, and his attitude towards investment portfolio risk is unique. We will configure the most suitable investment portfolio according to our own risk appetite.
For example, under a certain risk preference, use part of the funds to allocate safe assets and store them in banks; the other part is allocated to high-risk assets and buy stocks. But whether it is depositing in a bank or buying stocks, the risk and return of the combination are calculated on a weighted average, which is the optimal combination calculated under a risk preference.
However, in practice, people are very influenced by mental accounts when investing. When making investment decisions, all people will first divide their mental accounts, and then set a separate fund use for each account: the money used for food is never risky; The income guarantee; the money that hopes to get rich is used to speculate in stocks, and the ups and downs are relatively indifferent.
You see, is this very similar to when we were young, parents would put money for different purposes, such as food, daily necessities, and tuition fees, in different envelopes, and only consider the money in this envelope when spending? how to arrange.
The reason why you do this may be because mental accounts can help people save and restrain consumption due to separate accounting. For example, saving funds for a specific purpose (education, pension, etc.), using income from a certain channel as a specific investment, etc.
What's wrong with mental accounting?
First of all, mental accounts cause people to lack a long-term vision, unable to see the overall situation, and make investments overly conservative due to loss aversion.
Second, the total portfolio is not optimal for investors. In addition, due to the separate accounting of each account, the risk tolerance is different. For example, the risk tolerance for stocks is high, and the risk tolerance for education reserves is low. This will also allow investors to make separate decisions for each account, resulting in operational Mistakes, further deviate from the optimal total combination.
The Impact of Mental Accounting on Life Decision-Making
In fact, mental accounts not only exist in investment practice, but also widely exist in daily life.
| Pay first or pay later
For example, paying first and paying later, the mental accounts are different in these two cases, even if the real accounts are the same, the feeling is different.
Two friends traveled abroad successively. One chose the most expensive group, and when he came back, he was full of praise for that tour, saying that he could eat whatever he wanted, play whatever he wanted, and enter whatever attractions he wanted, and he felt really happy. Later, he gave the tour group the highest rating.
Another friend reported a cheap group. As a result, it wasn't a fun trip. What to eat, pay for; what to play, pay for. Later, he didn't think highly of that tour group either.
In fact, the total consumption of the two friends is the same, so the real accounts are the same. The difference between two people's feelings lies in the mental account.
The previous person pays first, and there is only happiness in the mental account of the game, and it is not affected by the previous group fee expenditure. How to play is as happy as it is, without pain. Every time the latter person consumes, the pleasure of consumption will be partially offset by the pain of paying.
| How wages and benefits should be paid
To give another example, the separate distribution of wages and benefits actually takes advantage of the characteristics of mental accounts. From the perspective of real accounts, whether it is wages or benefits, they are actually personal income. But if all the income is paid out as bank deposits together, it is far better to be divided into individual benefits. Different types of benefits will make people feel happy in their separate mental accounts, so the feeling of benefits will be higher.
How to make rational decisions?
When investing, don't make separate decisions about each asset, and don't pay too much attention to the rise and fall of a single account, but should be considered together.
In addition, we can use people's mental accounts to help us make decisions.
For example, if you are the boss, you should try to separate bonuses, benefits, consumption, gifts, etc. when you distribute benefits to employees, so that your employees can fully perceive the utility of each account and improve their sense of happiness.
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