A psychological law of inertia and the illusion of loss aversion
AbstractThe principle of loss aversion is thought to explain a wide range of anomalous phenomena involving tradeoffs between losses and gains. In this article, I show that the anomalies loss aversion was introduced to explain --- the risky bet premium, the endowment effect, and the status-quo bias --- are characterized not only by a loss/gain tradeoff, but by a tradeoff between the status-quo and change; and, that a propensity towards the status-quo in the latter tradeoff is sufficient to explain these phenomena. Moreover, I show that two basic psychological principles --- (1) that motives drive behavior; and (2) that preferences tend to be fuzzy and ill-defined --- imply the existence of a robust and fundamental propensity of this sort. Thus, a loss aversion principle is rendered superfluous to an account of the phenomena it was
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Bibliographic InfoArticle provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.
Volume (Year): 1 (2006)
Issue (Month): (July)
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inertia; loss aversion; endowment effect; status-quo bias; risky choice; reference-dependent preferences;
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