normally treat outcomes as gains and losses defined relative to a neutral refer-
ence point, rather than in terms of total wealth, as we shall illustrate. The sec-
ond property, calledloss aversion,statesthatlossesgenerallyloomlargerthan
corresponding gains. Thus, a loss of $X is more aversive than a gain of $X is
attractive, which is implied by a function that is steeper for losses than for
gains, that is, whereu($X)<u($X), as in figure 26.4.
The third property of the value function implies the risk attitudes described
earlier: risk aversion in the domain of gains and risk seeking in the domain
of losses. Although there is a presumption that people are entitled to their
own values and each of the attitudes above seems unobjectionable on its own,
the combination of the two leads to unacceptable consequences, as we shall
show.
Figure 26.3
For losses, subjective value, or utility, is a convex function of money.
Figure 26.4
Under prospect theory, the concave gain function and convex loss function of figures 26.1 and 26.3
are combined.
604 Eldar Shafir and Amos Tversky