Gains and Losses: The Arbitrary Effect of Decision Frame

The outcome of a lawsuit can sometimes turn on an arbitrary reference point.

Imagine that you bet a friend $50 that the Kansas City Chiefs would win Super Bowl LV in February of 2021. In a triumph of experience over youth, Tom Brady and the Tampa Bay Buccaneers beat Patrick Mahomes and the Chiefs. How would you describe the outcome of your bet? Most people would say something like, "I lost $50." That is only partly accurate, however. You have not only lost $50, but you have also failed to win the $50 that your friend would have paid you had the Chiefs won. In reality, Tom Brady's outstanding performance cost you $100 (sorry Brady-haters, it was outstanding).

The bet above demonstrates the widely studied, deeply powerful phenomenon that psychologists Amos Tversky and Daniel Kahneman called "framing." Framing is the tendency to treat an improvement from the status quo (gains) differently than a deterioration from the status quo (losses). Losses hurt more than identical gains feel good. In the Superbowl bet, the loss of $50 attracts much more attention than the foregone gain of $50. People work harder and take more risks to avoid losses than to obtain comparable gains. They also value their possessions more than comparable goods that they do not yet own (the endowment effect). Treating gains and losses differently can be sensible, but it often occurs when the status quo is arbitrary or even meaningless.

The influence of framing can be found in many areas of law. The Supreme Court interprets constitutionally enshrined federalism as precluding the federal government from imposing penalties (losses) on states for failing to enact legislation, but federal statutes that withhold federal highway funds (foregone gains) for failing to enact legislation are constitutionally acceptable. A New York statute forbids the use of surcharges (losses for those who use credit) on credit card transactions but allows discounts for cash (foregone gains for those who use credit). The Clean Air Act regulates new sources of air pollution (which can reduce potential profits from future facilities) far more aggressively than existing sources (which would impose losses on existing facilities). As the late Professor Patrick Atiyah put it: "To deprive somebody of something which he merely expects to receive is a less serious wrong, deserving less protection, than to deprive somebody of the expectation of continuing to hold something which he already possesses."

In research on sitting trial judges, we have found that framing has a big influence on how judges think. We conducted a series of eight experiments with trial judges. In each experiment, judges read a hypothetical case in which we varied the reference point of a lawsuit; half of the judges read a case involving a foregone gain for a litigant, while the other half read the same case recast as involving a loss for that litigant. For example, in one study, we asked trial judges to award compensatory damages for medical malpractice that left a patient permanently blind. For half of the judges, the surgery was necessary to restore vision to a patient who had recently lost it; for the other half, the surgery was necessary for the patient to avoid losing his vision. The judges awarded a median of $1.5 million in compensation for an operation that failed to restore the plaintiff's eyesight, but $2.5 million for an operation that deprived the plaintiff of his eyesight. The judges thus assigned a higher price to the loss of sight than to the foregone opportunity to regain vision.

In another study, we explored whether judges would react differently to evidence of age discrimination based on whether the alleged discrimination occurred in firing an employee as opposed to failing to hire a job applicant. We informed the judges of a state statute forbidding an employer from discriminating on the basis of age—a prohibition that applied with equal force to both hiring and firing. For half of the judges, the complainant was one of five finalists for a residence director job at a local college who ultimately lost out to four much younger applicants. For the other half, the complainant was one of five residence directors faced with a layoff due to staff reductions, and whom the college ultimately let go instead of four much younger employees. In both cases, the evidence that the college had favored younger applicants or employees was identical. Only 14% of the judges determined that age was a "substantial motivating factor" in the college's decision not to hire the complainant, compared to 30% of the judges who evaluated the decision to lay off the complainant. The same evidence seemed more compelling when the employee had been terminated than simply not hired.

In a third study, we asked judges whether they would rescind a contract based on mutual mistake. For half of the judges, the plaintiff seeking rescission was a buyer who had purchased a collectible he had thought was valuable but which actually turned out to be worthless. For the other half, the plaintiff was a seller who had sold a collectible he had thought was worthless but which was actually valuable. In both cases, the parties were ignorant of the item's actual value and had made no representations about its worth. Upholding the contract imposed a loss on the disappointed buyer but was a foregone gain for the disappointed seller. Although the doctrine of mutual mistake does not distinguish between buyers and sellers, the judges in our study did. Among those evaluating buyers, 82% favored rescission, as compared to only 41% of those evaluating sellers. We also found the same framing effect among a group of elite arbitrators who considered this same problem.

We also found that framing had a robust influence on contractual damages, wage disputes, water rights, settlement offers, liability for vaccines, and bankruptcy reorganization plans. In all of our experiments, the frames created an arbitrary influence. A lifetime of eyesight is not more valuable when it is lost rather than when a simple surgery that should restore it fails. Likewise, being fired is usually worse than not being hired, but the same evidence should not be evaluated as more probative of discrimination merely because firing rather than hiring is at stake. And finally, the mistake in our contracts case was just as costly to the seller as it was to the buyer, even though judges treated them differently.

An arbitrary reference point creates a powerful illusion. So long as they recognize the influence that frame has, however, judges can "imagine the opposite" by considering whether the case would come out differently if the stakeholder were in the opposite position. Also, even though research shows that lawyers are at least as vulnerable to the influence of framing as judges, lawyers can try to reframe how they present cases to judges. We suspect, however, that even with such efforts, frame will continue to influence case outcomes.

Our full article on framing in judges: Jeffrey J. Rachlinski & Andrew J. Wistrich, Gains, Losses & Judging: Framing the Judiciary, 94 Notre Dame L. Rev. 521 (2018).

Tomorrow: Emotional Influences on Judges