Loss aversion

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]

  1. ^ 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.
  2. ^ 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.
  3. ^ 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.
  4. ^ 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.
  5. ^ 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.
  6. ^ 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.