The analysis of the impact of the framing effect on the choice of financial products: an analytical hierarchical process approach

Most economic and financial theories assume that market participants act rationally and use available information in their decision-making processes to maximize their expected utility. Recently, the scientific debate in behavioral economics and finance has highlighted that individuals can make choices other than those envisaged by standard economic theory. In fact, the choices can be conditioned by the way in which the alternatives are presented. In particular, the framing effect refers to the cognitive bias wherein an individual’s choice from a set of options is influenced more by how the information is worded than by the information itself. The purposes of this study are: testing if the framing effect affects investor's perception of risk and, consequently, decision making in choosing financial products; investigating if the effect is different in relation to certain social, cultural and demographic characteristics of the investor. By considering Italian people aged between 20 and 64 years as target population, a questionnaire was administered to 1130 individuals to understand how two of the main common types of presentation of non-equity financial products (i.e.: “What-If” and “probabilistic scenarios”) can influence the decision-making process. The data analysis was carried out by using the analytical hierarchical process approach that is a multi-criteria support technique that allows to compare qualitative and quantitative criteria that would otherwise be difficult to compare. In the present paper, the use of analytical hierarchical process allowed the decomposition of each decision maker's decision-making process into personal characteristics.