Loss Aversion

Loss aversion is the empirical regularity, formalized within Prospect Theory, that people experience losses as roughly twice as painful as equivalent-magnitude gains are pleasurable, with the canonical coefficient estimated near 2 in many experimental studies. The phenomenon manifests in the endowment effect (people demand more to give up an item than they would pay to acquire it), status-quo bias, the disposition effect in stock-trading (selling winners and holding losers), and disproportionate avoidance of small fair gambles. Loss aversion is reference-dependent — it is asymmetry around a reference point rather than absolute risk aversion — and is central both to behavioral-economics theory and to applied work in marketing, negotiation, and policy design. Recent meta-analyses and critical work by Eldar Yechiam and others have argued the standard ~2 coefficient is overstated and varies substantially by context, though the underlying asymmetry is robust.