April 9

Loss Aversion and Prospect Theory

Daniel Kahneman and Amos Tversky's prospect theory shows people feel losses about twice as intensely as equivalent gains - loss aversion. This explains why people hold losing investments too long (avoiding realized losses), demand much more to sell something than they'd pay to buy it, and generally make risk-averse choices when facing gains but risk-seeking choices to avoid losses. This asymmetry pervades economic decision-making.