Figure 1, a graph of perceived value of gain and loss vs. strict numerical value of gain and loss. A loss of $0.05 is perceived with a much greater utility loss than the utility increase of a comparable gain.
Loss aversion is a psychological and economic concept,[1] which refers to how outcomes are interpreted as gains and losses where losses are subject to more sensitivity in people's responses compared to equivalent gains acquired.[2] Kahneman and Tversky (1992) suggested that losses can be twice as powerful psychologically as gains.[3]
When defined in terms of the utility function shape as in the cumulative prospect theory (CPT), losses have a steeper utility than gains, thus being more "painful" than the satisfaction from a comparable gain,[4] as shown in Figure 1. Loss aversion was first proposed by Amos Tversky and Daniel Kahneman as an important framework for prospect theory – an analysis of decision under risk.[5] Finance and insurance are the sub fields of economics with the most active applications.[6]