Loss Aversion

Loss aversion is the cognitive tendency to prefer avoiding losses to acquiring equivalent gains — a loss of $100 hurts more than a gain of $100 pleases. Central to prospect theory, loss aversion explains the endowment effect, the disposition effect in finance, and the reluctance of investors to sell assets at a loss. The mechanism is reference dependence: outcomes are evaluated relative to a reference point, and deviations below that point are weighted more heavily than deviations above it. The reference point itself is a cognitive anchor, making loss aversion a specific case of the broader anchoring and adjustment phenomenon. The neuroscience of loss aversion has identified distinct neural circuits for gain and loss processing, but the behavioral phenomenon remains robust across cultures and domains.