The best examples of framing effect in investment strategies (and how to fight them)

Real-world examples of framing effect in investment strategies

Let’s skip the theory and go straight to the money. The best examples of framing effect in investment strategies are rarely exotic. They’re painfully ordinary—and that’s what makes them dangerous.

Think about these situations:

• A retirement plan menu labels one option as a “Capital Preservation Fund” and another as an “Aggressive Growth Fund,” even though the risk gap between them is smaller than the labels suggest.
• A fund advertises “only 0.5% in annual fees” instead of “you’ll lose tens of thousands in lifetime returns to fees.”
• A robo-advisor shows a smooth, upward-sloping projection for a portfolio, but hides the volatility behind optimistic averages.

The facts haven’t changed. The frame has. And investors behave differently as a result.

Behavioral research going back to Kahneman and Tversky shows that people are far more sensitive to how outcomes are framed as gains or losses than to the actual probabilities involved. In investing, that framing often shows up in product labels, charts, fee disclosures, and even news headlines.

Positive vs. negative framing: the same investment, different behavior

One of the clearest examples of framing effect in investment strategies is how risk and return are described in positive versus negative terms.

Imagine a fund marketer says:

• “There’s an 80% chance this fund will beat inflation over 10 years.”

Now compare that to:

• “There’s a 20% chance this fund will fail to beat inflation over 10 years.”

Same probabilities, radically different emotional reaction.

In practice, you see this kind of framing in:

• Target-date retirement funds that emphasize “higher probability of meeting retirement income needs” instead of “meaningful chance of short-term losses along the way.”
• Structured products promoted as offering “downside protection” rather than highlighting the “upside cap” that limits gains.
• High-yield bond funds framed as “income opportunities” instead of “exposure to lower-credit-quality issuers.”

A 2023 survey from the FINRA Investor Education Foundation found that many retail investors underestimate downside risk when products are framed around income or protection rather than volatility and loss potential. The underlying risk is the same; the frame changes the perceived safety.

How to counter it: Whenever you see a positive frame (chance of success, income, protection), force yourself to restate it in negative terms: What’s the chance this fails? What does the worst 10% of outcomes look like? That simple reframing dramatically improves decision quality.

Fee framing: “small” percentages that quietly eat your retirement

Another powerful example of framing effect in investment strategies is how fees are explained. Most investors see 0.5% or 1% and think, “That’s not much.” That’s framing at work.

Consider two descriptions of the same advisory fee:

• “Our advisory fee is just 1% per year.”
• “Our advisory fee will reduce your ending retirement balance by tens of thousands of dollars over 30 years.”

Mathematically, they’re describing the same thing. Behaviorally, they are not.

Let’s put some numbers on it:

• \(10,000 invested for 30 years at 7% annual return grows to about \)76,000 before fees.
• Add a 1% annual fee (so net 6%), and it grows to about $57,000.

That “just 1%” fee costs you nearly \(19,000 on \)10,000 of starting capital. Scale that to a $300,000 retirement portfolio and you’re talking about hundreds of thousands of dollars.

Yet most fee tables are framed in small annual percentages, not long-term dollar impact. Research from the U.S. Department of Labor has repeatedly warned that small differences in fees can significantly erode retirement savings over time, but the way fees are framed keeps many investors complacent.

How to counter it: Whenever you see a percentage fee, translate it into lifetime dollars. The Department of Labor’s guidance on retirement plan fees is a good starting point for understanding this compounding effect: https://www.dol.gov/general/topic/retirement/fees.

Risk labels and product names: how words push you into the wrong bucket

Product names are one of the most underrated examples of framing effect in investment strategies. Many investors build portfolios based more on labels than on underlying holdings.

Common framing traps:

• “Capital Preservation” vs. “Short-Term Bond Fund”: Both might hold similar short-term bonds, but the “preservation” label makes investors think of bank-like safety, even when the fund can lose value.
• “High Dividend” vs. “Value Equity”: Both can be concentrated in the same sectors, but the dividend label attracts income-seekers who may underestimate equity risk.
• “ESG” or “Sustainable” funds: Some investors assume lower risk simply because the frame suggests responsibility or quality, even when volatility is similar to broad equity markets.

Morningstar and academic studies have shown that investors often treat “income” or “conservative” labels as proxies for safety, even when drawdowns can still be severe. The frame (name) overrides the reality (holdings and risk metrics).

How to counter it: Ignore the marketing name. Read the holdings, sector exposure, and historical drawdowns. If a “conservative” fund lost 20% in 2020 or 2022, the label is lying to you.

Performance charts: framing past returns to sell a story

Performance presentation is another rich source of examples of framing effect in investment strategies. The same return history can be framed to look like steady progress or gut-wrenching volatility.

Common framing tricks:

• Choice of time frame: Showing only the last 5 years of a growth fund (a strong period for tech-heavy portfolios) instead of a full 15–20 year cycle that includes crashes.
• Starting point bias: Picking a start date right after a major drawdown so the chart looks like a rocket ship.
• Cumulative vs. annual returns: Cumulative charts smooth out the pain of bad years, while annual bar charts expose the emotional roller coaster.

Research published by the CFA Institute and other organizations has highlighted how investors overreact to recent performance, especially when it’s presented in visually appealing charts that underplay volatility.

How to counter it: Reframe the chart yourself:

• Look at maximum drawdown and worst calendar years, not just average returns.
• Compare at least one full market cycle (including a major downturn) instead of just the last bull market.
• Ask: What would this have felt like to live through, year by year?

Retirement plan defaults: how “safe” and “aggressive” are framed

One of the most practical examples of framing effect in investment strategies shows up in workplace retirement plans.

Consider two default options:

• A “Stable Value Fund” framed as safe, with very low volatility but returns barely above inflation.
• A “Target Date 2060 Fund” framed as long-term growth, with more equity exposure and higher expected returns.

Many younger workers gravitate to the “stable” or “guaranteed” options simply because the frame emphasizes safety, even though, over 30–40 years, the real risk is failing to outpace inflation.

The U.S. Department of Labor’s guidance on Qualified Default Investment Alternatives (QDIAs) recognizes this: target-date funds and balanced funds are encouraged as defaults because they better align with long-term goals than stable value or money market funds. Yet when the plan menu frames cash-like options as “safe” and growth options as “risky,” many participants choose the wrong kind of safety.

How to counter it: Reframe risk in terms of your goal:

• For a 30-year horizon, the main risk is not short-term volatility; it’s failing to grow enough.
• For a 2–3 year horizon, volatility risk matters much more.

Ask yourself: Safe for what time frame? Safe against what outcome?

Robo-advisors and projections: optimistic framing of uncertainty

Digital platforms give us fresh examples of framing effect in investment strategies through how they present future projections.

Common framing patterns in 2024–2025 robo and app interfaces:

• Smooth projection bands that show a high probability of ending up within a neat range, even though real markets rarely move smoothly.
• Median outcome focus: Emphasizing the middle scenario (“most likely outcome”) instead of clearly highlighting the tails where real pain lives.
• Dollar goals framing: “You’re on track for $1.2 million at retirement” without equal emphasis on the uncertainty around that number.

Research in behavioral finance and financial planning (including work discussed by the CFP Board and academic conferences) shows that investors anchor heavily on single-point projections, underestimating risk when uncertainty is framed as a narrow band instead of a wide range.

How to counter it: When you see a projection:

• Ask for or look at the 10th percentile and 90th percentile outcomes.
• Mentally rehearse what happens if you land in the bottom 20% of outcomes, not the median.

You’re reframing from “expected future” to “range of possible futures,” which is much closer to how markets actually behave.

Cash vs. stocks: framing volatility as risk and stability as safety

One of the most expensive examples of framing effect in investment strategies is how people think about cash versus stocks.

Cash is framed as:

• Stable
• Safe
• Predictable

Stocks are framed as:

• Volatile
• Risky
• Uncertain

In the short term, that frame is accurate. Over a few months or a couple of years, cash almost always feels safer than equities.

Over 20–30 years, the frame flips. Historically, broad U.S. stock markets have delivered higher real (inflation-adjusted) returns than cash or short-term bonds. Meanwhile, cash has often lost purchasing power after inflation.

The Federal Reserve and academic sources like the Federal Reserve Bank of St. Louis have long documented the erosion of purchasing power through inflation. Yet very few investors frame cash as “risky” in real terms, even when inflation spikes as it did in 2021–2023.

How to counter it: Whenever you think “cash is safe,” add the missing frame: safe in nominal dollars, risky in real purchasing power over long periods. Then decide based on your actual time horizon, not just emotional comfort.

Media headlines and narrative framing: why you feel bullish or bearish for the wrong reasons

Market news might be the most visible example of framing effect in investment strategies. Headlines often frame the same data in wildly different ways:

• “Market rallies 2% on strong jobs report” vs. “Market spikes as Fed may delay rate cuts.” Same move, different narrative frame.
• “Investors lose $500 billion in market selloff” vs. “Stocks fall 2% after record-setting rally.” Same drop, but one sounds apocalyptic, the other like routine volatility.

When you build or adjust your portfolio based on these framed narratives, you’re not reacting to fundamentals; you’re reacting to story packaging.

Behavioral research from organizations like the CFA Institute and various finance departments at universities has documented how narrative framing in financial media amplifies herd behavior and short-termism.

How to counter it: Strip the headline to raw facts:

• What was the percentage move?
• Is this move large or small relative to normal volatility?
• Did the long-term earnings outlook or discount rate really change in a meaningful way?

Reframing the news from “story” to “data” helps you avoid emotional trading.

How to spot and neutralize the framing effect in your own investing

By now, you’ve seen multiple real examples of framing effect in investment strategies: fee descriptions, product names, performance charts, default options, projections, cash vs. stocks, and media narratives.

To make this practical, use a simple three-step checklist whenever you face an investment decision:

1. Ask: How else could this be framed?
If something is framed as a gain, restate it as a loss. If it’s framed as safe, restate the ways it could fail. If it’s framed in percentages, restate in dollar terms.

2. Separate the frame from the fact.
Write down the raw numbers: expected return, volatility, fees, time horizon, probability of bad outcomes. Ignore the product name and the marketing language.

3. Compare frames across alternatives.
Frame each option in the same way. For example, express all fees as 30-year dollar costs, or all risks as worst 10-year drawdowns. Once everything is framed consistently, the better choice often becomes obvious.

This is not about becoming cynical; it’s about becoming conscious. The best investors aren’t immune to the framing effect. They’re just quicker to say, “Hold on—what’s another way to look at this?”

FAQ: Framing effect and investing

How does the framing effect influence investment strategies in practice?
The framing effect shapes how investors perceive risk, return, and fees. When information is framed as a gain (“80% chance of success”), investors tend to be more risk-accepting. When framed as a loss (“20% chance of failure”), the same investment can feel too risky. This influences everything from asset allocation to product choice and trading behavior.

What are some common examples of framing effect in investment strategies?
Common examples include: fees described as small percentages instead of large lifetime dollar costs; funds labeled as “conservative” or “capital preservation” even when they can lose value; projections shown as smooth growth paths instead of wide ranges; cash framed as safe despite long-term inflation risk; and media headlines that turn normal volatility into dramatic stories.

Can you give an example of framing effect with retirement investments?
Yes. Many 401(k) participants choose stable value or money market funds because they’re framed as “safe,” especially after a market crash. Over a 30-year horizon, that framing can lead to lower real returns and a higher risk of underfunding retirement, compared with a diversified stock-heavy target-date fund that is framed as “riskier” but is better aligned with long-term growth needs.

How can investors reduce the impact of the framing effect?
Investors can reduce framing bias by deliberately restating information in multiple ways: gains vs. losses, percentages vs. dollars, short-term vs. long-term. Using objective tools—like fee calculators from the Department of Labor or risk questionnaires from reputable financial planning organizations—also helps. Most importantly, define your goals and time horizon first, then evaluate investments against those, rather than reacting to how products are presented.

Are there tools or resources that help reframe investment decisions?
Yes. The U.S. Department of Labor offers resources on understanding retirement plan fees and their long-term impact (https://www.dol.gov/general/topic/retirement/fees). Universities and nonprofit organizations like the CFA Institute publish investor education on behavioral biases, including framing. Many financial planners also use scenario analysis tools that show a range of possible outcomes instead of a single projected number, helping clients see risk more clearly.

The bottom line: the most expensive mistakes often come not from bad information, but from good information framed in a misleading way. Once you start spotting these examples of framing effect in investment strategies, you’ll notice them everywhere—and you’ll be far better equipped to protect your portfolio from them.