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. People are more willing to take risks (or behave dishonestly; e.g. Schindler & Pfattheicher, 2016) to avoid a loss than to make a gain. 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 et al., 2009) and has been 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.

People’s cultural background may influence the extent to which they are averse to losses (e.g. Wang et al., 2017).

(See also myopic loss aversion and 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.

Schindler, S., & Pfattheicher, S. (2017). The frame of the game: Loss-framing increases dishonest behavior. Journal of Experimental Social Psychology, 69, 172-177.

Wang, M., Rieger, M. O., & Hens, T. (2017). The impact of culture on loss aversion. Journal of Behavioral Decision Making, 30(2), 270-281.