Loss aversion

Loss aversion is the tendency for losses to feel more significant than equivalent gains. It helps explain why people often avoid choices that could leave them worse off.

Prospect theory: A theory of decision-making under risk in which people evaluate outcomes relative to a reference point and weight probabilities nonlinearly. Its value function gives losses a steeper slope than gains, formalizing loss aversion.
Daniel Kahneman: An Israeli-American psychologist whose research on judgment and decision-making earned the 2002 Nobel Memorial Prize in Economic Sciences. His collaboration with Tversky established loss aversion as part of prospect theory.
Behavioral economics: The study of how psychological, social, and emotional factors shape economic decisions. Loss aversion is one of its widely studied explanations for departures from standard economic models.
Risk aversion: A preference for a certain outcome over a gamble with the same expected value. Risk aversion concerns preference for certainty; loss aversion concerns unequal responses to gains and losses.
Measurement of loss aversion: Methods for estimating how much more strongly people weight losses than equivalent gains. Different tasks and reference points can yield different estimates of the effect.
Reference dependence: The tendency to evaluate outcomes as gains or losses relative to a reference point rather than by final wealth. Loss aversion requires a reference point that makes an outcome count as a loss.
Amos Tversky: An Israeli cognitive and mathematical psychologist known for foundational research on judgment and decision-making under uncertainty. His work with Kahneman developed the theory that first formalized loss aversion.
Prospect theory in economics: The use of prospect theory to explain economic choices involving risk and uncertain outcomes. It applies loss-sensitive valuation to choices such as insurance, investment, and pricing.
Regret aversion: The tendency to avoid choices that could produce regret after their outcomes become known. Anticipated regret can resemble loss aversion but arises from comparing outcomes with alternatives.
Reference point in economics: The benchmark against which an economic outcome is classified as a gain or a loss. Predictions about loss aversion depend on which benchmark a person uses.

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