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Behavioural Economics - What is Loss Aversion?

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 7 Jan 2023

The basic idea behind loss aversion is that people feel losses much more than gains. People do not treat gains and losses in a linear way!

Let's hear about prospect theory and loss aversion from a Nobel prize winner in economics - Professor Robert Shiller.

Prospect Theory (Yale)

What is loss aversion?

Loss aversion is the tendency for people to strongly prefer avoiding losses to acquiring equivalent gains. In other words, people are more motivated to avoid losing something that they already have than they are to gain something of the same value.

This can lead people to make decisions that are not necessarily in their best interest, because they are focused on avoiding potential losses.

For example, a person might be hesitant to invest their money in the stock market because they are afraid of losing their money, even though they know that investing has the potential to earn them a higher return in the long run.

Another example of loss aversion might be a person who is unwilling to try a new activity or take a risk because they are afraid of failing or experiencing a negative outcome.

Loss aversion can be a powerful force in decision-making, and can lead people to make choices that are more conservative or risk-averse than they might otherwise be.

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