Discuss the concept of narrow framing in Prospect Theory.

Narrow framing is a concept in Prospect Theory that refers to the tendency of individuals to make decisions based on a limited and isolated perspective, rather than considering the broader context or the overall portfolio of choices available to them. It is a cognitive bias that leads individuals to focus on a single decision or event, without taking into account the potential consequences or trade-offs associated with other options.

In Prospect Theory, decision-making is influenced by the way choices are framed or presented. Narrow framing occurs when individuals fail to consider the bigger picture and instead focus on the immediate decision at hand. This can lead to suboptimal choices and irrational behavior.

One example of narrow framing is the tendency to treat each decision as a separate entity, without considering the cumulative impact of multiple decisions. For instance, an investor may evaluate each investment opportunity individually, without considering the overall risk and return profile of their entire investment portfolio. This can result in a lack of diversification and increased exposure to risk.

Another example is the phenomenon of mental accounting, where individuals mentally compartmentalize their money into different categories or accounts. This can lead to suboptimal financial decisions, as individuals may prioritize short-term gains or losses in one account, without considering the overall financial situation.

Narrow framing can also be observed in everyday decision-making. For instance, individuals may focus on the immediate benefits of a purchase, without considering the long-term costs or consequences. This can lead to impulsive buying behavior and financial regret.

To overcome narrow framing, individuals should strive to adopt a more holistic and comprehensive approach to decision-making. This involves considering the broader context, evaluating the potential trade-offs and consequences of different options, and taking into account the overall portfolio of choices available. By expanding their frame of reference, individuals can make more informed and rational decisions that align with their long-term goals and objectives.