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Figure 1, a graph of perceived value of gain and loss vs. strict numerical value of gain and loss. A loss of $0.05 is perceived with a much greater utility loss than the utility increase of a comparable gain.
Loss aversion is a psychological and economic concept,[1] which refers to how outcomes are interpreted as gains and losses where losses are subject to more sensitivity in people's responses compared to equivalent gains acquired.[2] Kahneman and Tversky (1992) suggested that losses can be twice as powerful psychologically as gains.[3]
When defined in terms of the utility function shape as in the cumulative prospect theory (CPT), losses have a steeper utility than gains, thus being more "painful" than the satisfaction from a comparable gain,[4] as shown in Figure 1. Loss aversion was first proposed by Amos Tversky and Daniel Kahneman as an important framework for prospect theory – an analysis of decision under risk.[5] Finance and insurance are the sub fields of economics with the most active applications.[6]
^Schmidt, Ulrich; Zank, Horst (1 March 2005). "What is Loss Aversion?". Journal of Risk and Uncertainty. 30 (2): 157–167. doi:10.1007/s11166-005-6564-6. ISSN 1573-0476.
^Kahneman, D. & Tversky, A. (1992). "Advances in prospect theory: Cumulative representation of uncertainty". Journal of Risk and Uncertainty. 5 (4): 297–323. CiteSeerX 10.1.1.320.8769. doi:10.1007/BF00122574. S2CID 8456150.
^WAKKER, PETER; TVERSKY, AMOS (1993). "An Axiomatization of Cumulative Prospect Theory". Journal of Risk and Uncertainty. 7 (2): 147–175. ISSN 0895-5646. JSTOR 41760700.
^Kahneman, D. & Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under Risk". Econometrica. 47 (4): 263–291. CiteSeerX 10.1.1.407.1910. doi:10.2307/1914185. JSTOR 1914185.
^Barberis, Nicholas C. (2013). "Thirty Years of Prospect Theory in Economics: A Review and Assessment". The Journal of Economic Perspectives. 27 (1): 173–195. ISSN 0895-3309. JSTOR 41825467.
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