Trap of narrow-framing in investment decisions – Master Moves

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Decision making is everything , the person who makes right decisions 80 % of the time will be rewarded more than another who makes decision right 70 % of the time – Naval Ravikant

To put it in simple terms when facing a decision to be made, thinking narrowly in yes or no terms or black and white can be called as narrow framing.

Let’s consider a simple decision

You have a job offer and should accept or reject it in next 5 days would you take that offer or no ?

We would consider the above option with, I don’t have a job now so let’s take it now or I may lose the job FOMO ( Fear of missing out ) or you say no let’s wait for a better offer.

This is a typical Black and white thinking.

What’s the problem with such thinking ?

You forego many other options that you haven’t considered, what if the job market is dull and you remain unemployed for another year

You blind yourself to other future opportunities. Let’s assume you have accepted this at present and what if you have a better job offer in a near future ?

Your thinking is shallow and may obscure other ways of making use of the situation.

Let me take you through a similar situation I was in recently and how I avoided being trapped by narrow framing.

I was required to make a decision to buy/ sell / hold a company X that I have invested in.

I was faced with such a situation to decide. The first thing I thought was should i buy more or sell this or hold ? Logically if you dont like to buy at this price you have to sell . If you don’t want to sell you can buy more or hold. So what should is do ?

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At first I was blinded by narrow framing , my though process was based on current valuations and I decided to buy more as valuations were very attractive . So I decided to make use of the fall and accumulate more.

Whenever I make decisions I run it through 50-60 filters. Now applying Narrow framing filter i could see some of my flaws in the thought process. So let’s see how it played out.

Instead of just thinking of valuations I expanded my view more broadly. Let’s look how after taking a broad view the initial conjecture Changes.

A.What if valuations are not reflecting the Covid-19 issue ?

Yes, there are possibilities that valuations will take time to reflect. I always look for valuations only 1-2 years ahead so it’s important to assess current impact.

B. If there is a chance for a higher impact is it possible to wait for more attractive valuations ?

yes possible, but what material impact does it make to wait for a 10-15 % fall, there will be no benefits but only high impact cost if there is a rise in valuations.

C. Apart from valuations what is the opportunity cost of investing in this company and not in another company ?

This made me think more broadly for other opportunities that may be more attractive than this company , reasoning from this angle I came up with another company 2 in my PF with more attractive valuation which relatively was better.

D. Does it make sense to hold a certain percentage in cash ?

If company x looks attractive and have not reflected the impact so will other companies. So why not increase the cash percentage in the PF so that I may be able to wait for better opportunities, Now with more broader view I thought increasing cash also would be a good alternative.

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Now considering this decision from a multi dimensional angle I decided to trim my holdings in company X and invest a certain percentage in company 2 and increase my cash holding.

If I haven’t thought through from a broader scenario I might have ended up buying more in company X losing my opportunity cost to invest my money at a more attractive opportunity and also it was a wise decision to improve my cash holding too.

Narrow framing is just 1 model in decision making, the more models you think through the better will be your decisions.

How to avert narrow framing

1. While considering a decision always try to come up with more than 1 option. Don’t limit yourself to the first thing that comes to mind that’s a typical black and white thinking.

2. Don’t fall for snap judgements (system 2 – fast and emotional ) and make decisions quickly, it’s wise to take a step back and think about your possible alternatives (system 1 Rational and cortical ) and more scenarios ( Scenario planning )

3. Decision- making should be process oriented and not outcome oriented. When considering a decision most tunnel their vision because it lacks a process.

4. Narrow framing maybe a result of not trying to expend your thinking, most people are uncomfortable with thinking after they have come to a conclusion, they fall to the confirmation trap.

5. Most people are very uncomfortable with uncertainty, we want to reach a fast conclusion even if we may be wrong. This is another reason why we narrow frame our decisions.

6. We need to be just 1% better in our decisions which in the long term will compound. Don’t fall prey to the man with hammer syndrome, have more tools at your disposal.

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Some books on better decision making

1. Poor Charlie’s almanack

2. Thinking fast and slow

3. Decisive

4. Black swan

5. Thinking in bets

6. Calculated risk

7. Skin in the game

8. The art and science of prediction

9. FS blog

10. Pebbles of perception

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Ragavendhra Perumall

Ragavendhra Perumall

Ragav is an ardent follower of Warren Buffet, a political enthusiast and a business person. He writes more on real-life instances combined with the mental models. Reading widely and interacting with people in various fields have helped him become an astute investor.
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