It is often claimed that negative events carry a larger weight than positive events. Loss aversion is the manifestation of this argument in monetary outcomes. In this review, we examine early studies of the utility function of gains and losses, and in particular the original evidence for loss aversion reported by Kahneman and Tversky (Econometrica 47:263–291, 1979). We suggest that loss aversion proponents have over-interpreted these findings. Specifically, the early studies of utility functions have shown that while very large losses are overweighted, smaller losses are often not. In addition, the findings of some of these studies have been systematically misrepresented to reflect loss aversion, though they did not find it. These findings shed light both on the inability of modern studies to reproduce loss aversion as well as a second literature arguing strongly for it.
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For instance, when selecting between a 50:50 bet for $10 or −$10 and a similar bet for $20 or −$20, people presumably pick the former option.
As evidenced in a Google Scholar search from July 2017. From 105 available full texts who cited the sentence in whole only four cited the reference.
In addition, it is extremely difficult to directly investigate the effect of large losses in an ethical fashion using actual incentives.
The tenth data point is a repeated questioning of a participant (Bill Beard) and is not included; it shows a pattern similar to that of the top left pane.
By contrast, in portfolio theory (Markowitz, 1952), this would be captured by symmetric weights to gains and losses and a risk premium—an additional cost for taking risk which increases as a function of the distance from the preferred risk level.
The subsample presented in Swalm (1966) was also somewhat biased. Participants were initially collected from two populations: a single company referred to as “Company A” and a cross-industry population. All but one of the presented participants was from Company A.
Given equal distances between objective values in a gain and loss domain a and b for alternatives 1 and 2 (e.g., a1 = 1, a2 = 10; b1 = − 1, and b2 = − 10) if one is more sensitive to the loss domain (e.g., the correlation between choices and a is higher than the respective correlation with b), then assuming a negative linear effect of losses, this implies a stronger pull effect of large losses than large gains in terms of changes in standard deviations of choices, but a symmetric weaker effect for small losses. This can change if the references point is zero (a1 = 0, b1 = 0).
In a similar vein, Harinck, Van Dijk, Van Beest, and Mersmann (2007) examined the pleasantness level associated with gains and losses, and people’s willingness to pay for lotteries involving gains and losses of different sizes. They only found increased unpleasantness compared pleasantness ratings in outcomes above 50 Euros, and similarly report loss aversion in willingness to pay for large outcomes only.
While the preferred risk level account is apparently not consistent with the findings showing risk seeking for losses and risk aversion for gains (i.e., the reflection effect; Kahnman & Tversky, 1979), these regularities are explained by other factors besides the sensitivity to variance (e.g., diminishing sensitivity to zero) which could affect choice behavior in addition to a one’s preferred risk level. Supporting this view is findings of positive association between individuals’ risk taking levels in a gain domain and a mixed domain with symmetric gains and losses demonstrating consistency in individuals’ risk preferences independently of the losses involved (e.g., Yechiam & Ert, 2011).
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The author would like to thank Nathaniel J.S. Ashby, Elias Khalil, and Liat Levontin for their helpful comments.
This work was supported by the I-CORE program of the Planning and Budgeting Committee and the Israel Science Foundation (1821/12).
Conflict of interest
The author (EY) declares that he has no conflict of interest.
This article does not contain any studies with human participants or animals performed by any of the authors.
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Yechiam, E. Acceptable losses: the debatable origins of loss aversion. Psychological Research 83, 1327–1339 (2019). https://doi.org/10.1007/s00426-018-1013-8