the one that appeared risky. Thus, contract A was chosen more often in the
former case, when it was framed as riskless, than in the latter, when it was
framed as risky.
26.4 Loss Aversion
One of the basic observations regarding people’s reaction to outcomes is that
losses appear larger than corresponding gains. This asymmetry in the evalua-
tion of positive and negative outcomes is calledloss aversion.Lossaversion
gives rise to a value function that is steeper in the negative than in the positive
domain, as in figure 26.4. An immediate implication of loss aversion is that
people will not accept an even chance to win or lose $X, because the loss of $X
is more aversive than the gain of $X is attractive. Indeed, people are generally
willing to accept an even-chance prospect only when the gain is substantially
greater than the loss. Many people, for example, reject a 50–50 chance to win
$200 or lose $100, even though the gain is twice as large as the loss (Tversky
and Shafir 1992a).
The example above illustrates loss aversion in decisions involving risky
prospects. The principle of loss aversion applies with equal force to riskless
choice, between options that can be obtained for certain (Tversky and Kahne-
man 1991). It entails that the loss of utility associated with giving up a good
that is in our possession is generally greater than the utility gain associated
with obtaining that good. An instructive demonstration of this effect is pro-
vided in an experiment involving the selling of mugs (Kahneman, Knetsch,
and Thaler 1990). A class is divided into two groups. Some participants, called
sellers, are given a decorated mug that they can keep, and are asked to indicate
the lowest price for which they would be willing to sell the mug. A second
group, calledchoosers, are asked to indicate the amount of money that they
would find as attractive as the mug. Subjects in both groups are told that, after
they state their price, an official market price $X will be revealed and that each
subject will end up with a mug if his or her asking price exceeds $X, or with $X
if it is more than the subject’s asking price.
Noticethatthechoosersandthesellersarefacingpreciselythesamedecision
problem: they will all end up with either some money or a mug, and in effect
need to decide how much money they will be willing to take in place of the
mug. Hence, standard economic analysis predicts identical asking prices for the
two groups. The two groups, however, evaluate the mug from different per-
spectives: the choosers compare receiving a mug to receiving a sum of money,
whereas the sellers compare retaining the mug to giving up the mug in ex-
change for money. Thus, the mug is evaluated as a potential gain by the
choosers and as a loss by the sellers. Consequently, loss aversion, the notion
that losses loom larger than corresponding gains, predicts that the sellers will
price the mug higher than the choosers. This prediction was confirmed by the
data: the median price of the sellers ($7.12) was more than twice as large as the
median price for the choosers ($3.12). The difference between these prices
reflects an endowment effect, which was produced, instantaneously it seems,
by endowing individuals with a mug.
A closely related manifestation of loss aversion is a general reluctance to
trade, which is illustrated in the following study (Knetsch 1989). Subjects were
608 Eldar Shafir and Amos Tversky