loss aversion

Syllable breakdown

Dictionary meaning

the psychological tendency for losses to feel approximately twice as painful as equivalent gains feel pleasurable, causing people to make decisions that weight potential losses more heavily than potential gains of the same magnitude; loss aversion is one of the foundational concepts of prospect theory, developed by Daniel Kahneman and Amos Tversky in their 1979 paper Prospect Theory: An Analysis of Decision under Risk, and is among the most robust findings in behavioural economics; examples of loss aversion include investors holding losing positions far longer than rational portfolio management justifies — preferring the certain loss of selling to the uncertain possibility of recovery — and consumers placing greater weight on avoiding a fee than on gaining an equivalent discount; loss aversion interacts with the endowment effect — people value things more highly once they own them — and with the status quo bias — preferring the current state partly because changing it risks loss; Kahneman won the Nobel Prize in Economics in 2002 partly for this work

Examples

• Loss aversion explains why investors refuse to sell stocks that have fallen in value, preferring to wait for recovery rather than realise the loss.
• Framing a medical treatment as saving 200 lives rather than allowing 400 deaths produces different choices due to loss aversion.

Synonyms: loss sensitivity, loss salience