Loss aversion
What is loss aversion?
Loss aversion, also called loss aversion, is a psychological concept in which people tend to experience loss more strongly than gain. In other words, the negative feeling of losing something outweighs the positive feeling of an equivalent gain. This makes people engage in risk-averse behavior to avoid loss.
How does loss aversion work?
Loss aversion works because people perceive loss as more emotionally painful than the joy of a similar gain. This leads people to make choices that minimize loss, even if it means missing out on potential gains.
An example of loss aversion
Suppose you have a choice between a guaranteed profit of €50 or a 50% chance of €100 or nothing. Many people will choose the €50 to avoid loss, even though the expected value of both options is the same. Loss aversion also influences financial decisions, such as holding on to declining stocks too long to avoid losses even when it would be rational to sell them.
