Among social scientists, a vigorous debate over loss aversion

A principle that explains decision making — from investor behavior to insurance markets — isn’t ironclad

By Michael Schulson

Published November 27, 2021 9:00PM (EST)

Stock Market Arrow Graph Going Down  (Getty Images)
Stock Market Arrow Graph Going Down (Getty Images)

This article originally appeared on Undark.

While most people have likely never heard of loss aversion, the concept — arising in the social sciences some four decades ago — is among the most influential in the behavioral sciences. In a nutshell, it holds that when people make decisions, the impact of losing something carries greater weight than the impact of gaining something of similar value — or that, in the often-quoted words of psychologists Daniel Kahneman and Amos Tversky, "losses loom larger than gains."

The idea has come to inform empirical efforts to understand everything from investor behavior to insurance markets. Some analysts have even tried to quantify the ratio between the pain of loss and the pleasure of gains. Loss aversion, as one decision-research firm describes it, "is a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining."

And yet, in recent years, many behavioral scientists have begun to question whether loss aversion is quite so ironclad a principle of the human mind. Recent experiments, for example, have suggested that other factors — quite aside from a particular orientation toward losses and gains — might play key roles in quirks of human decision-making once chalked up to loss aversion. A blog post published earlier this year by the behavioral science consultant Jason Hreha went so far as to proclaim the death of the field of behavioral economics, largely because, he wrote, the "core finding of behavioral economics, loss aversion, is on ever more shaky ground."

Few researchers are ready to make such extreme pronouncements, but if there are indeed cracks in the loss aversion firmament, it might well be because the concept was never meant to be a grand, unifying theory of human behavior. According to Kahneman, one of the two researchers most closely associated with the birth of the idea, the concept was originally not much of an experimental finding at all, but rather an intuition. It was something that he and his longtime collaborator Tversky — who passed away in 1996 — thought was so obvious as to be almost trivial: Losing something has a bigger impact on us than winning something.

"What our grandmothers knew, which I think is an intuition that everybody has," Kahneman said in a recent call with Undark, "is that somehow 'bad' is stronger than 'good' in some ways."


It was some 30 years ago that researchers first handed out university-branded coffee mugs to half the members of an undergraduate law and economics class at Cornell University. What happened next would become an iconic moment in the field of behavioral science: The researchers asked the mug-owners to select a sale price for their new mugs, and the mug-free students to identify the amount they were willing to spend to buy one off a classmate. The mug-owning students wanted, on average, more than $5 for their mugs. The un-mugged undergrads were only willing to pay about half that. (At the university bookstore, the mugs retailed for $6.)

The researchers next tried the same setup, but with ballpoint pens. Same finding: The people who owned the objects valued them much more highly than the people who did not.

This divide between the haves and the have-nots, dubbed the endowment effect, has been replicated many times since. And after studying those 44 Cornell students and another group at Simon Fraser University, the mug researchers — Kahneman alongside economists Jack Knetsch and Richard Thaler — proposed an explanation for the phenomenon. It was, they wrote in a widely-cited 1990 paper, a manifestation of loss aversion, a concept they defined as "the generalization that losses are weighted substantially more than objectively commensurate gains in the evaluation of prospects and trades."

Kahneman and Tversky had first outlined a version of the concept in a 1979 paper. They highlighted a longstanding finding about gambles: that many people seem to shy away from bets that, for example, offer a 50 percent chance of winning some sum and an equal chance of losing it. (Indeed, even a bet that tweaks those odds to, say, a 50 percent chance of winning $20, and a 50 percent chance of losing $15, often feels unfavorable.)

Fueled by research like the Cornell mug study, loss aversion grew to be axiomatic in the emerging field of behavioral sciences. "The concept of loss aversion was, I believe, our most useful contribution to the study of decision making," Kahneman wrote in a 2002 autobiography after winning the a Nobel Prize in economics.

Not everyone, though, was convinced the concept was so robust. In 2003, a Stanford graduate student named David Gal ran a version of the classic mug experiment. He found the typical result, he said: People who owned the mugs valued them more than people who didn't. But, Gal recalled, something bothered him: His subjects mostly just seemed indifferent to the whole thing. "You have this vision — like, you're picturing people in the study, that they're really invested in these mugs," he told Undark. "But for the most part, people just didn't really care very much."

Instead, Gal began to wonder if subjects were hesitant to part with their mugs — or to offer money to buy one — mostly from inertia, rather than any strong feeling about losing or gaining a mug.

Other researchers have also raised questions about loss aversion. "Losses appear to loom larger than gains in some settings, but not in others," wrote a pair of Israeli behavioral scientists, Eyal Ert and Ido Erev, in one 2013 paper. In a series of six experiments, they showed how tweaking certain parameters — such as changing the stakes of a decision, or changing which option allowed the subject to maintain a status quo — could affect how research subjects weighed losses and gains.

Other researchers, including Eldad Yechiam at Technion-Israel Institute of Technology, were raising similar concerns. ("I'm somehow obsessed by it," Yechiam told Undark of his years-long work on the topic. Loss aversion "means that we are wired to sort of give the negative things in the world this huge weight. And it doesn't seem to agree with how I view the world, with how I view people.")

In a 2018 paper, Gal, now a professor at the University of Illinois-Chicago, returned to the mug experiment, along with a colleague, the Northwestern University social psychologist Derek Rucker. This time, though, they tweaked one variable. Instead of asking people how much money they would accept to sell a mug, they indicated that they would take the mug away — and then asked how much subjects would pay to keep it. They also asked people who didn't have a mug how much they would pay to buy one.

In theory, they argue, if the prospect of losses loomed larger than gains, people would pay more to keep a mug they already had than to buy one they did not. But that didn't happen: Whether they had the mug or not, people largely assigned it a similar value.

Another set of researchers set up a similar study, and, in results published earlier this year, reported a similar result: By asking people how much they'd pay to keep something they had been given, signs of loss aversion disappeared. While she doesn't argue against the existence of loss aversion, Wendy Liu, an associate professor of marketing at the University of California San Diego and an author on the paper, said it's not applicable in every circumstance. "Based on our own evidence, it's not a universal thing," she said. The research, she said, suggests that loss aversion may not be a good explanation for the endowment effect, and that researchers should stop equating the two.

Gal, Yechiam, and some other researchers now argue that many phenomena chalked up to loss aversion could, at least in theory, be explained by other causes, such as a bias toward inaction over action.

Gal describes the definition of loss aversion as "fuzzy and loose" — sometimes used to describe an underlying feature of human cognition, and other times used to describe a phenomenon (like the endowment effect) without necessarily making a claim about some deeper cause.

Many of his colleagues, he said, have soured on the principle. After the 2018 paper, Gal said, he received emails from colleagues saying they had come to believe that, in their past work, they had wrongly chalked up specific phenomena to loss aversion. Other researchers, he said, told him, "'I've been trying to find this stuff for years, and couldn't find any evidence for loss aversion" — but that peer reviewers were often hostile to such findings, and unwilling to publish the results.

Gal has sometimes taken a strong stand — he described loss aversion as a "essentially a fallacy" in a 2018 essay for Scientific American — but not everyone is convinced.

"There are a lot of phenomena that are explained by loss aversion," said Eric Johnson, a decision science expert at Columbia University. Johnson points to a recent metanalysis, published as a working paper, which analyzed 150 articles and found, on average, strong empirical evidence of people weighting losses more strongly than gains in their decision-making. While critics of loss aversion, he acknowledged, may be able to come up with alternate explanations for any specific application ­— such as the endowment effect — loss aversion offers the simplest explanation for all those diverse cases. Otherwise, he said, you "end up with this sort of zoo of partial explanations."

Giving serious credence to loss aversion skeptics, he suggested in a follow-up email, was drawing a false equivalency — similar to giving credence to climate change deniers.

For his part, though, Gal said he was unimpressed with the meta-analysis. "A meta-analysis can calculate an effect size, but in most cases doesn't tell us much about what causes the effect," he wrote in an email. "In this case, they are aggregating different effects likely caused by different processes and claiming to have found some general loss aversion coefficient."


Now 87 and an emeritus professor of psychology at Princeton University, Kahneman has not responded publicly to Gal, Rucker, or other recent challengers of the loss aversion consensus. But during a recent Zoom conversation from his apartment in Manhattan, he made it clear he had been following the controversy closely.

He agreed with Gal and others, he said, that evidence of loss aversion only appears in certain situations. "It's not a law of human nature that you have to find it in every context," Kahneman said.

"There are experiments where people don't find loss aversion," he added later. "And, again, there's an explanation for every one of them. That doesn't violate loss aversion, because there are exceptions to loss aversion."

What, then, could ever disprove the idea? Is loss aversion falsifiable? Probably not, said Kahneman. "I don't know, maybe it's falsifiable, it's hard to imagine. There are alternative explanations for just about any experiment," he said. But, he suggested, that didn't matter: In the science of decision making, the theory had established its place.

"Having a principle that helps understand a wide body of phenomena — that's considered useful," Kahneman said. "That doesn't mean that loss aversion's true. It means that it's useful."

This article was originally published on Undark. Read the original article.

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