Revise the belief in loss aversion while designing

The Nobel prize in economics was given to Daniel Kahneman in 2002 majorly for his work on Prospect Theory along with his colleague, Amos Tversky. One basic idea that challenged the 300-year old prevailing expected utility model and was instrumental towards getting the Nobel prize was of loss aversion – losses loom larger than gains from a neutral reference point [1]. Richard Thaler, who received the 2017 Nobel Prize in economics, had also made significant contributions to this same idea while challenging the neo-classical economic models with new empirical evidence like endowment effect. Neuroscience, behavioraleconomics, public policy, education, environmental action and multiple other domains have assumed loss aversion for last four decades when developing advisories, products and services.

However, the empirical evidence for loss aversion is turning out to be weak. Many studies did not find loss aversion or found revered loss aversion for a whole range of phenomena across consumer pricing, donation appeals, message framing in health care, risky bets, sunk cost in share trades etc. (see [2]). While uplifting the spirit of empiricism, it is dangerous to assume that studies that do not find loss aversion are aberrations from the norm as loss aversion is true. A more nuanced understanding of how we value gains versus losses is critical for development of technological, social or policy interventions.

A magnitude-dependent version provides a more nuanced prediction about loss aversion: gains loom equal to or larger than losses for low stakes, while losses loom larger than gains for high stakes [3]. This would need more evidence by testing the new hypothesis for different fundamental resources like money, time, environment and people’s lives. But, it is time to be critical about loss aversion and let empiricism yield new frontiers about the relative valuation of losses versus gains. So, if you are designing a product or service, stop believing that losses will loom larger than gains. This opinion was published in Frontiers in Psychology (2019), authored by Sumitava Mukherjee. Read the full opinion.

References

[1] Kahneman, D. (2003). Daniel Kahneman– Biographical. Retrieved August 04, 2019, from http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/kahneman-bio.html

[2] Gal, D., & Rucker, D. D. (2018). The loss of loss aversion: Will it loom larger than its gain?. Journal of Consumer Psychology, 28, 497-516.

[3] Mukherjee, S., Sahay, A., Pammi, V. C., &Srinivasan, N. (2017). Is loss aversion magnitude dependent? Measuring prospective affective judgments regarding gains and losses. Judgment and Decision Making, 12, 81–89.