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In cognitive science and behavioral economics, loss aversion refers to a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain. [ 1 ] [ 2 ] It should not be confused with risk aversion , which describes the rational behavior of valuing an uncertain outcome at less than its expected value .
The disposition effect can be minimized by a mental approach called hedonic framing, which refers to a concept in behavioral finance and psychology where people perceive and react differently to gains and losses based on how they are presented or "framed."
Studies in behavioral finance analyzed this pattern, observing that there is a tendency to avoid high-reward options in the market, as the risk of short-term loss potentially influences the broker. Acclaimed behavioral economists Benartzi and Thaler analyzed this concept, calling it the "equity premium puzzle [2]." This puzzle refers to the ...
This is what behavioral psychologists call loss aversion. Loss aversion is also what leads investors to hold on to underperforming investments longer than they’re useful, refusing to “cut ...
A famous loss-aversion experiment is to offer a subject two options: They can either either receive something like $30 in guaranteed money — or a coin flip where they can receive either $100 or ...
Loss aversion. Loss aversion refers to the tendency to place greater weight on losses compared to equivalent gains. In other words, ... Behavioral finance [74] ...
The correlation between the two theories is so high that the endowment effect is often seen as the presentation of loss aversion in a riskless setting. However, these claims have been disputed and other researchers claim that psychological inertia , [ 20 ] differences in reference prices relied on by buyers and sellers, [ 3 ] and ownership ...
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect. [1] [2]
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