Losing £100 hurts roughly twice as much as winning £100 feels good.
In 1979 Daniel Kahneman and Amos Tversky proposed that people weigh losses more heavily than equal gains, by a factor of about two. The same choice feels different depending on whether it is framed as a loss or a gain. The idea helped found behavioural economics, though researchers still argue about how far it reaches.
Loss aversion was introduced as part of prospect theory, Kahneman and Tversky's 1979 account of how people really make decisions under risk. Traditional economics treated people as calculating expected values. Prospect theory said that we judge outcomes relative to a reference point, usually what we already have, and that the pain of falling below it is steeper than the pleasure of rising above it. In Kahneman's own words, the response to losses is stronger than the response to corresponding gains. Empirically, losses tend to be weighted about twice as heavily as equal gains.
It is not the same as risk aversion, the reasonable preference for a sure thing over a gamble of equal expected value. Loss aversion is about framing. A 5 dollar discount and a 5 dollar surcharge avoided are financially identical, but shoppers respond to them differently. Marketers use this with free trials and rebates: once something feels like yours, giving it up registers as a loss.
The idea has been used to explain a lot: the endowment effect, the pull of the status quo, reluctance to accept inheritance taxes, and even the equity premium puzzle, the long-standing question of why shares have paid so much more than bonds. Tversky and Kahneman extended it to riskless choices in 1991, under the slogan 'losses loom larger than gains'.
It is also contested. Several studies have found little or no loss aversion for small stakes, and the psychologist David Gal has argued that many effects credited to it are better explained by simple inertia. Others have replicated it across several samples. One alternative, called loss attention, suggests that losses mainly make us pay closer attention, rather than weigh more. The honest summary is that loss aversion is real in many settings but not a universal law.
Source: Wikipedia — Loss aversion · Text summarised from Wikipedia (CC BY-SA 4.0)
