Loss Aversion: Why Losing Hurts More Than Winning Feels Good
by turhan-ergene
A look at prospect theory and loss aversion — why losing something feels worse than gaining the equivalent, and how that one asymmetry quietly drives sunk costs, framing effects and risky decisions. For anyone curious why people act against their own best interests around money and risk.
Prospect theory, developed by Daniel Kahneman and Amos Tversky, says people don't judge outcomes by their final wealth. They judge them against a reference point — usually how things already stood — and a loss relative to that point is felt roughly twice as intensely as an equal-sized gain. A worker whose pay is cut from $50,000 to $45,000 reports feeling considerably worse than a worker who has always earned $45,000, even though both end up with the exact same salary.
Two investors both end the year with $90,000 in their account. Investor A started the year with $100,000 and lost $10,000. Investor B started the year with $80,000 and gained $10,000. According to prospect theory, which investor is likely to feel worse about the year, even though both now hold the same amount of money?
multiple choice
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