divided into two groups: half the subjects were given a decorated mug, and the
others were given a large bar of Swiss chocolate. Later, each subject was shown
the alternative gift, and offered the opportunity to trade the gift they had re-
ceived for the other. Because the initial allocation of gifts was arbitrary and the
transaction was costless, economic theory predicts that about half the subjects
should exchange their gifts. On the other hand, if losses loom larger than gains,
then most participants will be reluctant to give up the gift in their possession (a
loss) in order to obtain the other (a gain). Indeed, only 10 percent of the partic-
ipants chose to trade their gifts. This result contrasts sharply with the 50 per-
cent predicted by the standard economic analysis, in which the value of a good
does not change when it becomes part of one’s endowment.
More generally, loss aversion entails a strong tendency to maintain the status
quo, because the disadvantages of departing from it loom larger than the
advantages of its alternative. This phenomenon has been demonstrated in sev-
eral experiments (Samuelson and Zeckhauser 1988). For example, subjects were
given this problem: ‘‘You have inherited a large sum of money from your great
uncle. You are considering different portfolios. Your choices are to invest in (1)
a moderate-risk company, (2) a high-risk company, (3) treasury bills, (4) mu-
nicipal bonds.’’ Four groups of subjects were presented with the same problem,
but with one of the four options designated as the status quo. One version, for
example, included the statement: ‘‘A significant portion of the portfolio you
inherited is invested in a moderate-risk company.’’ The data show that desig-
nating a particular option as the status quo greatly increased the tendency to
choose it (even though transaction costs were said to be insignificant). Al-
though all four groups chose among the same options, subjects tended to stick
with the option in which they were already invested.
A striking framing effect that relies on people’s tendency to maintain the
status quo has been observed in the context of real-world insurance decisions.
New Jersey and Pennsylvania have recently introduced the option of a limited
right to sue, which entitles automobile drivers to lower insurance rates. The
two states differ, however, in what they offer consumers as the default option.
New Jersey motorists have to acquire the full right to sue (transaction costs are
minimal: one need only sign), whereas in Pennsylvania the full right to sue is
the default. When offered the choice, only about 20 percent of New Jersey
drivers chose to acquire the full right to sue, but approximately 75 percent of
Pennsylvania drivers chose to retain it. The difference in adoption rates due to
the different frames had financial repercussions that are estimated at around
$200 million (Johnson, Hershey, Meszaros, and Kunreuther 1993).
Recall that loss aversion gives rise to a value function with a steeper slope in
the negative than in the positive domain. Beyond the reluctance to depart from
the status quo, this result implies that the same difference between two options
will be given greater weight when it is viewed as a difference between two
disadvantages, or losses (relative to a reference point) than when it is viewed as
a difference between two advantages, or gains. This prediction is demonstrated
in a study in which subjects compare a combination of a small gain and a small
loss with a combination of a larger gain and a larger loss (Tversky and Kahne-
man 1991). Subjects are asked to suppose that they are looking for employ-
ment while their present training job is ending. They are asked to consider two
Decision Making 609