Overall description of loss aversion theory
Figure 1, a graph of perceived value of gain and loss vs. strict numerical value of gain and loss. A loss of $0.05 is perceived as having a greater utility loss than the utility increase of a comparable gain.
In cognitive science and behavioral economics , loss aversion refers to a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain.[ 1] [ 2] It should not be confused with risk aversion , which describes the rational behavior of valuing an uncertain outcome at less than its expected value .
When defined in terms of the pseudo-utility function as in cumulative prospect theory (CPT), the left-hand of the function increases much more steeply than gains, thus being more "painful" than the satisfaction from a comparable gain.[ 3] Empirically, losses tend to be treated as if they were twice as large as an equivalent gain.[ 4] Loss aversion was first proposed by Amos Tversky and Daniel Kahneman as an important component of prospect theory.[ 5] [ 6]
^ Schmidt, Ulrich; Zank, Horst (1 March 2005). "What is Loss Aversion?" . Journal of Risk and Uncertainty . 30 (2): 157–167. doi :10.1007/s11166-005-6564-6 . ISSN 1573-0476 .
^ Abdellaoui, Mohammed; Bleichrodt, Han; Paraschiv, Corina (2007). "Loss Aversion under Prospect Theory: A Parameter-Free Measurement" . Management Science . 53 (10): 1659–1674. doi :10.1287/mnsc.1070.0711 . hdl :1765/29218 . ISSN 0025-1909 . JSTOR 20122321 .
^ WAKKER, PETER; TVERSKY, AMOS (1993). "An Axiomatization of Cumulative Prospect Theory" . Journal of Risk and Uncertainty . 7 (2): 147–175. doi :10.1007/BF01065812 . ISSN 0895-5646 . JSTOR 41760700 .
^ Kahneman, D. & Tversky, A. (1992). "Advances in prospect theory: Cumulative representation of uncertainty". Journal of Risk and Uncertainty . 5 (4): 297–323. CiteSeerX 10.1.1.320.8769 . doi :10.1007/BF00122574 . S2CID 8456150 .
^ Kahneman, D. & Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under Risk". Econometrica . 47 (4): 263–291. CiteSeerX 10.1.1.407.1910 . doi :10.2307/1914185 . JSTOR 1914185 .
^ Barberis, Nicholas C. (2013). "Thirty Years of Prospect Theory in Economics: A Review and Assessment" . The Journal of Economic Perspectives . 27 (1): 173–195. doi :10.1257/jep.27.1.173 . ISSN 0895-3309 . JSTOR 41825467 .