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Loss Aversion (Behavioural Economics)

  • Levels: A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC
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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!

Loss aversion is often seen in financial markets: Some evidence that stock market investors hold their investment positions with paper losses too long and sell their investment holding paper gains too early.

Loss aversion is often appealed to by businesses trying to sell funeral and airline insurance - they have developed pitches to consumers that appeal to the fear of financial loss and specifically the worry that they will not be able to afford to pay for the funeral of a loved one at a time of extreme grief. The pain of losses is greater than the pleasure of a similar gain.

Behavioural Economics - Loss Aversion

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

Prospect Theory (Yale)

View our full playlist of revision videos on behavioural economics over on the Tutor2u Youtube Channel:

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Second in Business Studies and Economics

The Broxbourne School, Broxbourne, Hertfordshire

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Geoff Riley

Geoff Riley FRSA has been teaching Economics for thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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