The Loss of Loss Aversion: Will It Loom Larger Than Its Gain? David Gal Derek D. Rucker University of Illinois at Chicago Northwestern University Accepted by Sharon Shavitt, Associate Editor Loss aversion, the principle that losses loom larger than gains, is among the most widely accepted ideas in the social sciences. The first part of this article introduces and discusses the construct of loss aversion. The sec- ond part of this article reviews evidence in support of loss aversion. The upshot of this review is that current evidence does not support that losses, on balance, tend to be any more impactful than gains. The third part of this article aims to address the question of why acceptance of loss aversion as a general principle remains per- vasive and persistent among social scientists, including consumer psychologists, despite evidence to the con- trary. This analysis aims to connect the persistence of a belief in loss aversion to more general ideas about belief acceptance and persistence in science. The final part of the article discusses how a more contextualized perspective of the relative impact of losses versus gains can open new areas of inquiry that are squarely in the domain of consumer psychology. Keywords Loss aversion; Sociology of science One of us polled approximately 80 people present we have encountered near unanimous support for for a conference session on consumer decision mak- the premise that losses loom larger than gains. ing at the 2016 Society for Judgment and Decision Although anecdotal, we view these examples as Making Conference in Boston. The question posed illustrations of the near universal acceptance among was simple: Which of the following do you believe? social scientists of loss aversion—the idea that losses loom larger than equivalent magnitude gains. The A Losses loom larger than gains expression “loom larger” is used to indicate that B Gains loom larger than losses losses are experienced with greater psychological C Losses and gains have similar psychological impact. For example, an extrapolation from loss impact aversion is that the loss of $5 is more painful than the gain of $5 is pleasurable. Loss aversion is a cen- All but three participants raised their hands to tral idea of Prospect Theory (Kahneman & Tversky, indicate they believed that losses loom larger than 1979), a set of connected ideas initially intended to gains. Not a single person indicated a belief that provide a descriptive model of behavior in the con- gains loom larger than losses. And, only three partic- text of risky choice. Kahneman and Tversky’s ipants indicated a belief that losses and gains have (1979) paper is the most cited paper in all of eco- roughly similar psychological impact. To put this nomics and the third most cited paper in psychol- observation in context, this occurred at a session ogy (Simonsohn, 2014). where participants were made aware the topic of the Although prospect theory contains ideas besides talk was to challenge the notion that losses generally loss aversion, in his Nobel Prize biography, Kahne- loom larger than gains. Similarly, at talks and con- man wrote that, “the concept of loss aversion was, I versations with colleagues at multiple universities believe, our most useful contribution to the study of decision making” (Kahneman, 2003). More recently, Kahneman (2011) wrote, “The concept of fi Received 20 March 2018; accepted 20 March 2018 loss aversion is certainly the most signi cant contri- Available online 30 March 2018 bution of psychology to behavioral economics” The authors gratefully acknowledge helpful comments from (p. 300). As further illustration of the importance Eric Anderson, Jonathan Baron, Bobby Calder, Blake McShane, Brian Sternthal, Christian Wheeler, and Eldad Yechiam. We also attributed to loss aversion, in a paper that outlines thank the editor, Sharon Shavitt, for feedback and guidance. Correspondence concerning this article should be addressed to David Gal, University of Illinois at Chicago, 601 S. Morgan St, © 2018 Society for Consumer Psychology Chicago, IL 60607, USA. Electronic mail may be sent to davidgal@ All rights reserved. 1057-7408/2018/1532-7663 uic.edu. DOI: 10.1002/jcpy.1047 2 Gal and Rucker the practical value of prospect theory, loss aversion we recommend the adoption of a contextual per- was cited in 5 of 10 examples where prospect the- spective as a means to develop a better understand- ory could be observed in the real world (Camerer, ing of the psychological processes associated with 2000). Additional evidence for the widespread losses and gains and suggest directions for future acceptance of loss aversion is the official announce- research. ment of Matthew Rabin’s receipt of the John Bates Clark Medal awarded to the best economist under 40. The award committee cited his work that sup- Part 1: Understanding What Loss Aversion Is ported loss aversion as a primary basis for the award (American Economic Association, 2001; see Put simply, loss aversion suggests that losses are also Camerer & Thaler, 2003). experienced with greater psychological force than Loss aversion is cited widely across the social gains of similar magnitude. Along these lines, it has sciences in law, medical decision making, political been argued that “losses hurt about twice as much science, marketing, finance, consumer psychology, as gains make us feel good” (p. 137; Thaler, 2000). and many other areas, and has even entered the Importantly, losses and gains are defined in terms popular lexicon (Lewis, 2016). It has been cited as of changes from what individuals subjectively per- an explanation for many well-known phenomena, ceive as a neutral reference point (e.g., the status such as the compromise effect (Simonson & Tver- quo). For example, one individual who obtained $5 sky, 1992), the disposition effect (Odean, 1998), the might view the $5 as a gain, whereas another indi- default effect (Johnson & Goldstein, 2003), and the vidual that expected to obtain $10, but only equity premium puzzle (i.e., Benartzi & Thaler, obtained $5, might view the $5 obtained as a loss 1995). It has been celebrated (“Three Cheers—Psy- of $5 relative to his expectation (Kahneman & Tver- chological, Theoretical, Empirical—for Loss Aver- sky, 1979). sion”; Camerer, 2005), recognized as a “seemingly Two aspects of loss aversion are particularly ubiquitous phenomenon” (Novemsky & Kahneman, noteworthy. First, most writings on loss aversion 2005), and described as “one of the most fundamen- assume it to be a fundamental and generalizable tal and well-documented biases in information pro- principle rather than contextual in nature. Second, cessing. .” (Rozin & Royzman, 2001, p. 306). loss aversion is atypical for a psychological princi- Here, we offer a review and discussion of the lit- ple in that it is defined without regard to a specific erature on loss aversion. Our main conclusion is psychological process; it describes rather than that the weight of the evidence does not support a explains behavior. Both of these points merit addi- general tendency for losses to be more psychologi- tional discussion to properly appreciate the con- cally impactful than gains (i.e., loss aversion). struct of loss aversion. Rather, our review suggests the need for a more On the first point, loss aversion has been repre- contextualized perspective whereby losses some- sented as a fundamental principle. Loss aversion is times loom larger than gains, sometimes losses and not understood as the idea that losses can or some- gains have similar psychological impact, and some- times loom larger than gains, but that losses inher- times gains loom larger than losses. In other words, ently, perhaps inescapably, outweigh gains. For the choice presented at the beginning of this article example, Kahneman, Knetsch, and Thaler (1990, p. is a false one as it denied the audience the possibil- 1326) describe loss aversion as “the generalization ity of a contextual perspective. Rather, the question that losses are weighted substantially more than should have offered a fourth option: all of the objectively commensurate gains.” In a similar fash- above are true depending on the context. ion, other researchers do not qualify the idea of loss The remainder of this article is partitioned into aversion; Tversky and Kahneman (1986, p. S255) four parts. In the first part, we discuss, in more state that “the response to losses is more extreme detail, what loss aversion is. In the second part, we than the response to gains”; and Kahneman and consider the evidence on the relative impact of Tversky (1984, p. 342) state “the value function losses versus gains. A review of the evidence chal- is. considerably steeper for losses than for lenges the idea that losses fundamentally loom lar- gains.” ger than gains, and thus challenges the idea of loss This observation is not to say that researchers aversion as a generalizable principle. In the third who accept loss aversion as a generalized principle part, we aim to address the question of why the are so narrow as to explicitly state that loss aver- acceptance of loss aversion remains persistent and sion is universal. Yet, as noted, it is often the case pervasive among social scientists. In the fourth part, that efforts are not undertaken to qualify loss The Loss of Loss Aversion 3 aversion or explicitly state, for instance, that cir- aversion was explicitly introduced as a means to cumstances and psychological processes exist that describe rather than to explain behavior. To illus- lead losses and gains to have similar psychological trate, prospect theory, of which loss aversion is a impact, or that lead gains to loom larger than key parameter, has been described by its progeni- losses. Indeed, even when researchers who accept tors as a “descriptive model of choice” (Tversky & loss aversion discuss “boundaries of loss aversion,” Kahneman, 1986, p. S255). Thaler elaborates on this they tend to reinforce and anchor on the basic idea notion and states that “Descriptive theories try to that losses have fundamentally greater impact than characterize actual choices.