Loss aversion

Loss aversion 2018-07-05T15:35:45+00:00

Loss aversion is an important 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. As 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 can explain why penalty frames are sometimes more effective than reward frames in motivating people (Gächter, Orzen, Renner, & Starmer, 2009) and is sometimes applied in behavior change strategies. The website Stickk, for example, 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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