Loss Aversion


Loss aversion refers to people's tendency to prefer avoiding losses to acquiring gains of equal magnitude. In other words, the value people place on avoiding a certain loss is higher than the value of acquiring a gain of equal size. Consider, for instance, the subjective value of avoiding a loss of $10 compared with gaining $10. Usually, people say that the former has a higher value to them than the latter. Such a preference seems striking, given that, objectively, $10 is $10, regardless whether it is lost or gained. Nevertheless, the aversion toward incurring losses is a strong and reliable effect, and the value of avoiding a loss is usually twice as high as the value of acquiring an equivalent gain.

Theoretical Explanation

Loss aversion can be ...

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