Introduction. Theoretical Explanation of Loss Aversion. Definition of loss aversion, a central concept in prospect theory and behavioral economics. We offer a new psychological explanation of the origins of loss aversion in which loss aversion emerges from differences in the distribution of gains and losses people experience. Let’s take a look at the two I see most often: loss aversion and conformity. ... A host of social psychology experiments have explored the powerful, insidious nature of conformity. Summarize the results for students: All of the short demonstrations illustrate that people tend to avoid losses. I’m not convinced that the experiment had a design with the strength necessary to elicit a loss aversion parameter of prospect theory (assuming it exists). What is Loss Aversion? Experiment 1: Gain VS Loss. Nevertheless, the aversion toward incurring losses is a strong and reliable effect, and the value of avoiding a loss is usually twice as high as the value of acquiring an equivalent gain. … It also includes the subsequent effects on the markets. Let’s explore some experiments that prove the impact of loss aversion. In one pioneering experiment, seven college students were assembled in a classroom and asked to compare lengths of lines. The loss aversion hy-pothesis was introduced by Kahneman and Tversky (1979) as one of the core elements of their prospect theory. Loss Aversion Experiments: What is the impact? People tend to weigh losses more than gains when deciding what to do and so avoid losses. Loss aversion is a tendency in behavioral finance Behavioral Finance Behavioral finance is the study of the influence of psychology on the behavior of investors or financial practitioners. In one study, each participant was given $50. 1. Keywords: loss aversion, loss premium, cumulative prospect theory, gender differences JEL Classification: C9 1 , D8 1 This paper provides an experimental investigation of loss aversion. One of the most robust empirical findings in the behavioral sciences is loss aversion—the finding that losses loom larger than gains. In the first round, participants had two choices: Option 1: Keep $30 of it Option 2: Gamble with a 50/50 chance of keeping or losing the entire $50 Tell the students that the endowment effect, loss aversion, and default bias are commonly observed in experiments and are related. Loss aversion is a bedrock principle of behavioral psychology today. The loss aversion bias is not always dreadful to have, as in many cases it is beneficial to our way of life. The psychologists Daniel Kahneman and Amos Tversky showed that even something as simple as a coin toss demonstrates our aversion to loss. 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