௠ Academy of Management Journal 2010, Vol. 53, No. 2, 411–431. AFFECT AND THE FRAMING EFFECT WITHIN INDIVIDUALS OVER TIME: RISK TAKING IN A DYNAMIC INVESTMENT SIMULATION MYEONG-GU SEO BRENT GOLDFARB University of Maryland LISA FELDMAN BARRETT Boston College We examined the role of affect (pleasant or unpleasant feelings) and decision frames (gains or losses) in risk taking in a 20-day stock investment simulation in which 101 participants rated their current feelings while making investment decisions. As pre- dicted, affect attenuated the relationships between decision frames and risk taking. After experiencing losses, individuals made more risky choices, in keeping with the framing effect. However, this tendency decreased and/or disappeared when loss was simultaneously experienced with either pleasant or unpleasant feelings. Similarly, individuals’ tendency to avoid risk after experiencing gains disappeared or even reversed when they simultaneously experienced pleasant feelings. One of the most commonly cited deviations from only small to moderate size and that nearly a quarter rational decision making is what is commonly re- of the effects examined (28%) were either nonsignif- ferred to as the “framing effect”—that is, the ten- icant or in the direction opposite to prediction. dency for people to avoid risk when a decision is A growing body of research suggests that human framed in terms of potential gains—and to instead affect1 is an important individual-level factor that increase risk when a choice is framed in terms of influences both risk perception and risk choice (cf. potential losses (Kahneman & Tversky, 1979; Tver- Rottenstreich & Hsee, 2001; Shiv, Loewenstein, Be- sky & Kahneman, 1991, 1992). Widely accepted in chara, Damasio, & Damasio, 2005; Slovic, Finucane, the literature as a dominant descriptive theory of Peters, & MacGregor, 2002). This literature suggests irrational choices (see Hastie and Dawes [2001] and that deviations from the framing effect can be attrib- Bazerman [2006] for reviews), the framing effect uted to affective states. Yet past research has shown has been extensively applied to understanding complex and inconsistent patterns of affective influ- firm-level risk choices and supported in various ence on risky choice (cf. Au, Chan, Wang, & Vertin- empirical settings (e.g., Audia, Locke, & Smith, sky, 2003; see Isen [2000] for a review), making it 2000; Baum, Rowley, Shipilov, & Chuang, 2005; difficult to explain how and when such affective de- Chattopadhyay, Glick, & Huber, 2001; Fiegenbaum viations may occur. For example, positive affect has & Thomas, 1988; Greve, 1998; Jegers, 1991; Lant, promoted risk seeking in some studies (e.g., Au et al., Milliken, & Batra, 1992; Wiseman & Gomez-Mejia, 2003; Isen & Patrick, 1983) but risk aversion in others 1998). Yet, despite its status, the framing effect is not (e.g., Arkes, Herren, & Isen, 1988; Isen & Geva, 1987). robust at the individual level of analysis (Sitkin & Isen and her colleagues (e.g., Isen, Nygren, & Ashby, Pablo, 1992; Wiseman & Catanach, 1997). For exam- 1988; Nygren, Isen, Taylor, & Dulin, 1996) have sug- ple, in a meta-analysis of 136 empirical studies Ku¨h- gested that one factor responsible for these inconsis- berger (1998) concluded that the framing effect was of tent findings might be a decision’s situational con- text, which in turn influences how the decision is This research was supported by a National Science Foundation (NSF DRMS #0215509, to Lisa Feldman Bar- 1 We use “affect” as a broad and general term referring rett) and a Boston College Dissertation Research Grant (to both to various affective states, including mood, which is Myeong-Gu Seo). We give our thanks to Jason Colquitt, a prolonged and diffused affective state associated with Cindy Stevens, Ken Smith, Debra Shapiro, Subra Tangi- no particular object, and to discrete emotions, such as rala, Gilad Chen, Jeffrey Furman, Gerard Hoberg, Zur anger and fear, which are intense prototypical affective Shapira, and the anonymous reviewers for their helpful experiences directed toward certain objects (cf. Forgas, comments and feedback on this article. 1995; Russell, 2003). 411 Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder’s express written permission. Users may print, download or email articles for individual use only. 412 Academy of Management Journal April framed. Through a series of experimental studies, is held constant at the neutral level. Then we de- they found that people in a positive feeling state velop specific hypotheses regarding how changes (compared with those in neutral affective states) were in individuals’ affective states may influence risk more risk averse only when a possible loss appeared taking by affecting these cognitive processes or by- real and salient. However, positive feelings led to passing them entirely. greater risk seeking in other conditions (e.g., Isen et al., 1988). These findings suggest that framing effects and affective influences on risk taking are highly in- THEORETICAL BACKGROUND terrelated; perhaps one effect cannot be precisely un- AND HYPOTHESES derstood without explicitly considering the other. In this study, we contribute to research on deci- Much research has been devoted to understand- sion making under risk and to prospect theory in ing how managers and employees make decisions particular (Tversky & Kahneman, 1991, 1992), by when faced with uncertainty (see Hastie and Dawes examining the relationships between framing, af- [2001] for a review). A central finding in this long fect, and risk taking. In so doing, we explore both stream of research is the framing effect: individuals the mediating and the moderating mechanisms tend to avoid risks when experiencing gains or through which a broad range of affective states— exceeding a reference point, and they seek risks both pleasant and unpleasant feelings—systemati- when facing losses or performing below a reference cally create deviations from predicted framing ef- point. The framing effect has been mainly under- fects. We also contribute to research on affect and stood from the perspective of prospect theory (cf. decision making by demonstrating that the deci- Ku¨ hberger, 1995). As in other cognitively based sion frames of gain and loss are important situa- decision-making theories (e.g., subjective utility the- tional factors that shift the effects of pleasant and ory), in prospect theory it is assumed that risky unpleasant feelings on risk taking into functionally choices result from two cognitive judgments: (1) a opposite directions by magnifying certain types of judgment about the utility (value) of a decision out- affective influences while inhibiting others. come, and (2) a judgment about the subjective prob- We provide support for our theory in an empiri- ability of that outcome. To generate predictions con- cal setting that closely mimics actual decision mak- sistent with the framing effect, prospect theory ing under risk. Subjects were recruited from invest- suggests that individuals frame decisions relative to a ment clubs and made investment decisions that reference point, so that the marginal utility decreases had significant financial consequences (payoffs as the decision outcome deviates from this reference ranged from $100 to $1,000). These payoffs were point. (Kahneman & Tversky, 1979; Tversky & Kah- likely to trigger a wide range of pleasant and un- neman, 1991, 1992). Prospect theory also explains pleasant feelings during decision making. This sit- that the utility is further weighted by the subjective uation contrasts sharply with those in past studies probability assessments that overweight low-proba- in which student participants have often made bility outcomes and underweight high-probability choices with small or hypothetical payoffs (cf. Ku¨h- outcomes. Such weighting may overwhelm the fram- berger, 1998; Ku¨ hberger, Schulte-Mecklenbeck, & ing effect when the probability of an outcome is very Perner, 2002), potentially inhibiting the role of af- small. This feature reconciles the theory with “one- fect. In this sense, we complement the findings of in-a-million” phenomena such as the purchase of previous experimental studies that have empha- negative expected–value lottery tickets or a greater sized internal validity (cf. Ku¨ hberger et al., 2002; fear of travel on airplanes than travel in cars. Rottenstreich & Hsee, 2001; Shneideman, 2008). In In general, scholars explain the framing effect addition, our longitudinal research design followed using a consequentialist assumption that people individuals over time, allowing us to examine dy- make decisions after weighing the risks and payoffs namic, within-person relationships among frames, associated with possible choices (Loewenstein, We- affect, and risk taking, thereby extending research ber, Hsee, & Welch, 2001). As illustrated in Figure 1, findings that are predominantly based on a be- one’s wealth position relative to a reference point tween-individual (cross-sectional) research design (i.e., perceived as a gain or a loss) is subject to cogni- (Ku¨ hberger, 1998). Since real-life decisions under tive processes (e.g., utility functions and probability risk are seldom made in isolation from previous weights), which in turn determine risk taking (arrow decisions, this research design also contributes to “a”). The implicit assumption here is that any factors the predictive