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Loss aversion was popular in explaining many phenomena in traditional choice theory. In 1980, loss aversion was used in Thaler (1980) regarding endowment effect. [8] Loss aversion was also used to support the status quo bias in 1988, [9] and the equity premium puzzle in 1995. [10]
On a broader scale: Consider an administration debating the implementation of a controversial reform, and that such a reform yields a small chance for a widespread revolt. "[T]he disutility induced by loss aversion," even with minute probabilities of said insurrection, will dissuade the government from moving forward with the reform. [14]
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 ...
Loss aversion, where the perceived disutility of giving up an object is greater than the utility associated with acquiring it. [74] (see also Sunk cost fallacy) Pseudocertainty effect, the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes. [75]
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] In prospect theory it is appropriate to use the selected status quo to determine the reference point.
Benartzi & Thaler (1995) contend that the equity premium puzzle can be explained by myopic loss aversion and their explanation is based on Kahneman and Tversky's prospect theory. [18] They rely on two assumptions about decision-making to support theory; loss aversion and mental accounting. [18]
Status quo bias has been attributed to a combination of loss aversion and the endowment effect, two ideas relevant to prospect theory.An individual weighs the potential losses of switching from the status quo more heavily than the potential gains; this is due to the prospect theory value function being steeper in the loss domain. [1]
Mental accounting can result in people demonstrating greater loss aversion for certain mental accounts, resulting in cognitive bias that incentivizes systematic departures from consumer rationality. Through an increased understanding of mental accounting differences in decision making based on different resources, and different reactions based ...