Loss aversion is not supported by the evidence

This article is essentially a press release for the author&#x27;s own paper: <a href="https:&#x2F;&#x2F;onlinelibrary.wiley.com&#x2F;doi&#x2F;abs&#x2F;10.1002&#x2F;jcpy.1047" rel="nofollow">https:&#x2F;&#x2F;onlinelibrary.wiley.com&#x2F;doi&#x2F;abs&#x2F;10.1002&#x2F;jcpy.1047</a><p>Which itself is a part of a series of articles in JCP debating the issue: <a href="https:&#x2F;&#x2F;onlinelibrary.wiley.com&#x2F;doi&#x2F;abs&#x2F;10.1002&#x2F;jcpy.1054" rel="nofollow">https:&#x2F;&#x2F;onlinelibrary.wiley.com&#x2F;doi&#x2F;abs&#x2F;10.1002&#x2F;jcpy.1054</a><p>The definitive statement made by this article&#x27;s headline isn&#x27;t really supported by the evidence presented in the papers. Rather, the state of affairs seems to be that &quot;loss aversion&quot; has been the victim of incessant overgeneralisation. It&#x27;s a very simple hypothesis about human behaviour that plays nicely into a lot of interesting (and therefore publishable) narratives. This has lead people to blindly accept the general hypothesis of loss aversion without enough critical investigation of its manifestation. The authors don&#x27;t really refute &quot;loss aversion&quot; (i.e. they don&#x27;t present an alternative theory to explain the papers that purport to demonstrate &quot;loss aversion&quot;), but rather they refute the pop-psychology belief that it&#x27;s a general principle of human behaviour.

This article is getting flamed pretty good. Here&#x27;s another perspective I&#x27;ve learned as a software developer. Building on incorrect abstractions is much more damaging than redundancy in your code. It obscures the underlying design that you&#x27;re trying to unearth and model, leading others down a path with a weak foundation. I think we&#x27;re well served to narrow the scope of any scientific finding beyond what might seem reasonable. The human mind is a pattern identification machine, and it finds false positives in science as often as it does in religion.

I&#x27;m picking through the author&#x27;s paper and I don&#x27;t buy this conclusion. I have a bone to pick with his evidence: for example, he makes a comparison between &quot;willingness to expend time to drive to obtain an accidentally left behind unused, new-condition notebook (vs. willingness to expend driving time to obtain a new notebook at no financial cost)&quot;. The extent of the former he denotes as WTP-Retain and the latter WTP-Obtain. Even if these two values are equal in a study, that doesn&#x27;t contradict the principle of loss aversion. In the case where a subject has already left behind his&#x2F;her notebook, the loss has already happened. How can this measure loss aversion when the loss has already occurred? I think it&#x27;s good the authors are trying to tease apart action vs inaction from loss&#x2F;gain but these conclusions don&#x27;t seem valid to me.

I do struggle sometimes to see how one could do proper science in the field of psychology. It always seems like every experiment contains multiple hidden assumptions, a myriad of uncontrolled-for variables and has more alternative hypotheses that fit the data than you could shake a stick at.<p>Is this me being all Dunning Kruger? Is it my positivist bias obscuring my vision? Have I misunderstood the nature of the scientific method or missed some major aspect of practical epistemology? I sincerely hope so as the alternative explanation regarding the nature and visibility of the emperor&#x27;s couture is rather upsetting.<p>I do genuinely think I am probably - at least partially - incorrect on this. But I would like some help in shaking my sense of unease.

The loss aversion is almost trivially explained by the marginal value theorem. The subjective value of money is around log(money), that is, a meaningful change takes an extra 0 in the paycheck or in the price tag.<p>So, if you have $200, getting $100 one thing, losing $100 is way worse, since log(200)=2.30, log(200)-log(100)=0.3, log(300)-log(200)=0.18. A potential loss of $100 must be rewarded by a gain of $200 to &quot;feel&quot; worthwhile if you already have $200, since log(400)-log(200)=log(200)-log(100).

Hmm...<p>So here is an interesting thought experiment. Suppose you take a person with some appreciable intelligence (at least average) but no particular knowledge about a certain topic. In this instance, we&#x27;ll let that topic be psycology.<p>Now we present this person with an unfortunate dilemma. For a particular hypothesis, they observe a significant amount of peer reviewed literature asserting empirical evidence in the affirmative. They don&#x27;t have any real familiarity with any individual papers, but they can understand that there&#x27;s an established consensus.<p>On the other hand they are given an article like this one, which mounts a critical refutation of all the established literature. Furthermore, this lone paper is presented to our stalwart examiner amidst the zeitgeist of a reproducibility crisis. Thus we have a mountain of peer reviewed but undigestible evidence on one side, and one readily digestible paper on the other which specifically rebuts the mountain of evidence.<p>The fundamental dilemma is this: how should this person examine the available evidence to maximize their chances of coming to the correct conclusion? Should they abstain from trying to discern the truth of the matter, and strike out any opinion they could have as unqualified? Should they read through the most comprehensive surveys of available evidence to come to a full understanding? Should they take the new, contrarian paper at face value?<p>There are a few dimensions here which (from my view) make the dilemma nearly intractable unless you 1) abstain from an opinion, or 2) become a subject matter expert. The cloud of the reproducibility crisis is a first dimension of uncertainty - not only does that muddy the waters for existig research, but we also have to be careful not take contradictory research at face value simply because it&#x27;s contrarian. For another, we have to figure out how to weight the reliability of evidence against our own time. It&#x27;s tempting to discount the evidence of existing research if an especially compelling critique is released, because we can more easily read it and follow its arguments.<p>It seems like this is enormously difficulty all around. How do we rate the critical correctness of differing amounts of conflicting literature published under academic uncertainty?

After reading the paper that this article was based on, this article and title feel sensationalized. It&#x27;s not that the evidence of loss aversion was wrong, or statistically invalid, but just may point to different underlying factors or psychological mechanisms.<p>However, this is just a couple of researcher&#x27;s opinions, and tomorrow a response article may come out saying that loss aversion IS supported by evidence.<p>To me, this is the sign of a healthy science.

Interesting how their review omits the paper that has conducted the most direct test of loss aversion:<p><a href="https:&#x2F;&#x2F;pubsonline.informs.org&#x2F;doi&#x2F;abs&#x2F;10.1287&#x2F;mnsc.1070.0711" rel="nofollow">https:&#x2F;&#x2F;pubsonline.informs.org&#x2F;doi&#x2F;abs&#x2F;10.1287&#x2F;mnsc.1070.071...</a><p>Also they claim the body of evidence doesn’t find support for loss aversion. But a meta analysis on the topic does in fact find support for loss aversion (albeit the magnitude is probably smaller than originally thought):<p><a href="https:&#x2F;&#x2F;papers.ssrn.com&#x2F;sol3&#x2F;papers.cfm?abstract_id=3189088" rel="nofollow">https:&#x2F;&#x2F;papers.ssrn.com&#x2F;sol3&#x2F;papers.cfm?abstract_id=3189088</a>

I don&#x27;t find the listed examples convincing. Especially:<p>&gt; And people are not particularly likely to sell a stock they believe has even odds of going up or down in price (in fact, in one study I performed, over 80 percent of participants said they would hold on to it).<p>How naïve is that? We&#x27;re not interested in what people said they would do. We want to know what they did!

&gt; However, this process advantages incumbent theories over challengers for a number of reasons, including confirmation bias, social proof, ideological complacency, and the vested interests of scientists whose reputations and even sense of self are tied to existing theories. A consequence is scientific inertia, where weak or ill-founded theories take on a life of their own, sometimes even gaining momentum despite evidence that puts their veracity in doubt.<p>A wonderful, concise summary of some of the human obstacles to the progress of ideas, theories, stories and models about people and the world, scientific in nature or not.

On the face of it, and with the benefit of hindsight if the paper&#x27;s presented theory is valid, if loss aversion as dominant motivation were a thing wouldn&#x27;t human civilization have never progressed beyond hunter gatherer nomads?<p>Doesn&#x27;t the fact that we keep growing and progressing as a species even tho the getting of these gains exposes us to risks, not just in the getting there, but once we have arrived, the &quot;curse&#x2F;paradox of development&quot;, suggest that loss aversion is <i>not</i> a majority principle of human behavior?<p>But... maybe...gain attraction &#x2F; gain pursuit <i>is</i> a general principle...perhaps of all life, not just ours? Maybe that&#x27;s one of the characteristics that tautologically has to define life. Life exists in an uncertain environment and couldn&#x27;t continue to do so without taking risks &#x2F; experimenting into that unknown.

&gt; People do not report their favorite sports team losing a game will be more impactful than their favorite sports team winning a game.<p>For fans of winning teams (Warriors, Patriots, etc.) I&#x27;m not sure if this is true. They&#x27;re expected to win, so watching them win can feel like nervous relief or ambivalence but watching them lose can feel like disappointment.<p>I think we see loss aversion in soccer too where teams will often play &quot;not to lose&quot; and &quot;park the bus&quot; rather than risk pushing forward and trying to win the game but being vulnerable to counter attacks.<p>In video games however most seem to favor aggressive styles of play and loss aversion is likely an instant loss.<p>I&#x27;m sure as with most social behavior loss aversion varies and depends on a complex set of conditions. I&#x27;m sure in some contexts it&#x27;s certainly at play though.

The article&#x27;s author David Gal claims that &#x27;loss aversion&#x27; is a fallacy. But in the book Thinking Fast and Slow, Daniel Kahneman says that the following experiment demonstrates loss aversion.<p>-----<p>People are randomly given one of two problems:<p>Probem A: In addition to whatever you own, you have been given $1,000. You are now asked to choose one of these options: 50% chance to win $1,000 OR get $500 for sure<p>Problem B: In addition to whatever you own, you have been given $2,000. You are now asked to choose one of these options: 50% chance to lose $1,000 OR lose $500 for sure.<p>-----<p>According to Kahneman, many more people will take the gamble when it is framed as potential win (Problem A) rather than as a potential loss (Problem B).<p>So is Gal saying this experiment is not reproducible or that it doesn&#x27;t demonstrate loss aversion?

Economics as a pseudo science of emphatic statements about human behaviour is looking pretty tragic.

I&#x27;ve long been skeptical of much of the behavioral economics literature. Not that it&#x27;s necessarily wrong, but that the experiments are so contrived that they&#x27;re difficult to generalize. But the pattern we see is, a contrived example with undergraduate students given $20 bills or something, and then cherry picking of anecdotal real world evidence.<p>It&#x27;s easy to say that consumers and investors behave irrationally, it&#x27;s harder to tease out hidden factors in a rational utility&#x2F;loss function that may depend more on the expected value of one action.

I think the whole point of Thaler’s assertion is that loss aversion is a type 1 bias, so will be demonstrated despite whatever people say when using their type 2 reasoning.

Losing money makes you a loser, gaining money is normal, so beyond the actual event, there are identity things at play. In their terms, spending more on a product or less, is not actually touching that identity, because both are just being a spender. I agree about the consequences part: losing equals no roof vs winning equals extra vacation. I think the rest is about the identity that comes with losing.

Hypothesis: the set of people who want to see loss aversion refuted intersection (sic) heavily with the set of people who want to raise taxes

The author is the one &quot;peddling&quot; the idea that loss aversion is a phalacy but at least he seems to (ironically) recognize that his argument is in itself part of the social&#x2F;argumentative part of science. Even so, this article seems to draw conclusions as if they were widely held beliefs (I&#x27;m not qualified to speak to these claims until I do my own research).

Isn&#x27;t the bias in loss aversion the fact that losing 50 bucks out of 100 isn&#x27;t symmetric to winning 50 bucks from a capital of 100? If I lose 50, I need to double my new capital to recover my former position, but when I win 50, I &quot;only&quot; need to lose 33% of my new capital. When I lose, relatively speaking, I&#x27;m further away than when I win.

The Ikea effect is a form of loss aversion. This alone shows that someone hasnt done their homework.<p>&quot;A bird in hand is worth two in the bush&quot; is a popular saying with its equivalent in almost every culture.<p>Diversification which is studied, recommended and practiced by almost every investor, CEO, child... Is related to loss aversion.<p>There are many more real life examples of loss aversion.

Contrarian science is important if it can successfully refute a claim, but has it in this case? Scientific American is sharing how the sausage is made (peer review science), potentially before the final product is ready.

Loss aversion, as it stands today, can be falsified in certain situations so its obviously not writ in stone. What is required is even more study of the context where it still holds.

a suggestion - loss aversion might be a manifestation of something else - namely poor decision making under stress.The loss causes the stress, which causes the poor decision making.

psychology as a discipline is not looking so hot these days

With the paradox of choice, most people are hypersatured with (the paradox of) choices, opportunities and distractions... so any “loss” seems inconsequential at the time because no one seems any more valuable than another. The key fallacy of this attitude is that the world is a small place, life is finite and will end. It doesn’t imply feverishly hustling every tiny opportunity, but filtering and carefully exploring choices with a sound decision framework.<p>Also, most people rarely make rationally-beneficial decisions based on other a myriad of fears, prejudices, laziness, negative cognitive distortions, distractions or inadequate future-planning. Worse, most people are sold on hype, feelings, gossip, peer testimonials and appearance when they can’t be bothered to do due-diligence.<p>OTHO of gain avoidance&#x2F;scarcity: You can put a “free” sign on a decent household good, set it out, and it won’t move... put a price-tag of $100 on and watch it get “stolen.”<p>tl;dr: The human condition is messy and imperfect... there’s no firm solution except thorough qualitative hypothesis testing via experiences.