Loss aversion is an important BE concept associated with prospect theory and is encapsulated in the expression “losses loom larger than gains” (Kahneman & Tversky, 1979). It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining, and since people are more willing to take risks to avoid a loss, loss aversion can explain differences in risk-seeking versus aversion.  Loss aversion has been used to explain the endowment effect and sunk cost fallacy, and it may also play a role in the status quo bias. The basic principle of loss aversion is sometimes applied in behavior change strategies, and it can explain why penalty frames are sometimes more effective than reward frames in motivating people (Gächter, Orzen, Renner, & Starmer, 2009). The website Stickk allows people to commit to a positive behavior change (e.g. give up junk food), which may be coupled the fear of loss—a cash penalty in the case of non-compliance. (See also regret aversion.)

 

Gächter, S., Orzen, H., Renner, E., & Starmer, C. (2009). Are experimental economists prone to framing effects? A natural field experiment. Journal of Economic Behavior & Organization, 70, 443-446.

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291.

 

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