current wealth W and an even chance to move to W + $20 or to W n
indispan> – $20. This representation appears psychologically unrealistic:
People do not normally think of relatively small outcomes in terms of states
of wealth but rather in terms of gains, losses, and neutral outcomes (such
as the maintenance of the status quo). If the effective carriers of subjective
value are changes of wealth rather than ultimate states of wealth, as we
propose, the psychophysical analysis of outcomes should be applied to
gains and losses rather than to total assets. This assumption plays a
central role in a treatment of risky choice that we called prospect theory
(Kahneman and Tversky 1979). Introspection as well as psychophysical
measurements suggest that subjective value is a concave function of the
size of a gain. The same generalization applies to losses as well. The
difference in subjective value between a loss of $200 and a loss of $100
appears greater than the difference in subjective value between a loss of
$1,200 and a loss of $1,100. When the value functions for gains and for
losses are pieced together, we obtain an S-shaped function of the type
displayed in Figure 1.

Figure 1. A Hypothetical Value Function

The value function shown in Figure 1 is (a) defined on gains and losses
rather than on total wealth, (b) concave in the domain of gains and convex
in the domain of losses, and (c) considerably steeper for losses than for
gains. The last property, which we label loss aversion , expresses the