Loss aversion is the tendency for the pain of losing to be psychologically more powerful than the pleasure of an equivalent gain. The concept was introduced by the psychologists Daniel Kahneman and Amos Tversky as part of prospect theory, their alternative to expected utility theory, and their experiments suggested that losses are felt roughly twice as strongly as equivalent gains. Loss aversion is used to explain a range of otherwise puzzling economic behavior, including the endowment effect, the status quo bias and why investors are often reluctant to sell assets that have fallen in value even when holding on to them is no longer the rational choice.
Facts
Core ClaimLosses are felt as psychologically heavier than equivalent gains, a pattern prospect theory built into its value function, and the same asymmetry was later used to explain the endowment effect, where people demand more to give up a good than they would pay to acquire it. 1 First Described Year Classification
Type of Phenomenon Connections
Associated With
A core component of Tversky and Kahneman's prospect theory: losses loom larger than equivalent gains.
A core component of Kahneman and Tversky's prospect theory: losses loom larger than equivalent gains.
In Branch
Sources
1. Wikipedia: Loss aversion
Wikimedia Foundationlead paragraph, definition
In cognitive science and behavioral economics, loss aversion is a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain.
lead section, defining sentence
In cognitive science and behavioral economics, loss aversion is a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain.
origin/history passage
In 1979, Daniel Kahneman and his associate Amos Tversky originally coined the term "loss aversion" in their initial proposal of prospect theory as an alternative descriptive model of decision making under risk.
lead section, phenomenon-kind classification
In cognitive science and behavioral economics, loss aversion is a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain.
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