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Revise the Belief in Loss Aversion
Published in Frontiers Media S.A.
2019
Volume: 10

Abstract

Many might be promptly answering yes to such a question, especially those trained in psychology and applied behavioral sciences (like behavioral economics, medical decision-making, marketing, science communication, environmental action, or public policy). From the time Kahneman and Tversky (1979) proposed Prospect theory as an alternative to the dominant expected utility model in economics, the landscape of psychology (and recently, neuro/behavioral economics) has changed. Instead of the then-common idea of expected utility that explained the valuation of outcomes, Kahneman and Tversky suggested viewing possible outcomes as prospects by combining a value function and a probability function. The value function (with which we are concerned with here) was based on the loss aversion principle that states losses are weighted subjectively more than gains for the same objective magnitude, measured from a neutral reference point. This meant that the psychological value (or intensity) of losing (−500$) was much more than the value of gaining (+500$). The formal representation of the value function captures both risk aversion and loss aversion. The curvature of diminishing marginal utility explains risk aversion and an asymmetric slope at the origin codes differential subjective utility of gains vs. losses. Formally, the function is defined as a mapping from objective value (x) to subjective utility of the objective value u(x):

About the journal
Journal Scopus Frontiers Media S.A. 16641078 No