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Prospect theory and loss aversion
Kahneman and Tversky proposed that people judge outcomes as gains and losses from a reference point, with losses weighing more. The 1979 choice data are well documented. How general loss aversion is, and how far it explains consumer behavior, is disputed.
- Where it sits
- Academic psychologyResearch published for other researchers and students.
- Evidence level
- ContestedThe evidence conflicts or is disputed, for example after failed replications.
- Sources inspected
- 6 of 64 with the relevant text, company document or archive item checked, 2 as an abstract or reference article, 0 not verified.
What happened
In March 1979 Daniel Kahneman and Amos Tversky published Prospect Theory: An Analysis of Decision under Risk in Econometrica. They argued that expected utility theory describes real choices under risk poorly and proposed a descriptive alternative. Kahneman shared the 2002 Nobel Memorial Prize in Economic Sciences with Vernon Smith. Tversky had died in 1996.
The psychological idea
In the model, people evaluate outcomes as gains or losses from a reference point, not as final wealth. The value function is concave for gains, convex for losses and steeper for losses, which is the usual statement of loss aversion. Probabilities become decision weights that overweight low probabilities. The paper also names the certainty effect and the reflection effect.
In practice
The 1979 evidence came from questionnaires. In Problem 1, with 72 respondents, 82 per cent chose a sure 2,400 over a gamble with a .33 chance of 2,500, a .66 chance of 2,400 and a .01 chance of nothing. Choices reversed when gains became losses. In marketing, Hardie, Johnson and Fader (1993) fitted a reference-dependent brand-choice model to scanner data and reported significant loss aversion.
Why it mattered
Gal and Rucker report that loss aversion, a central idea of the paper, is cited widely in law, marketing, finance and consumer psychology, and they describe the 1979 paper as the most cited in economics. Hardie and colleagues applied it to brand choice and Mrkva and colleagues tested it in field surveys.
Limits and qualifications
The 1979 data are hypothetical choices, as the authors acknowledge. Gal and Rucker (2018) argued the evidence does not show that losses, on balance, loom larger than gains. Mrkva and colleagues (2020), using five samples with 17,720 people, found loss aversion at all knowledge levels, weaker among more knowledgeable people, and doubted that it is a fallacy. A consumer reading of price changes as losses is interpretation unless a study tested it.
Evidence behind the claims
Kahneman and Tversky's 1979 paper proposed that value is assigned to gains and losses relative to a reference point, that the value function is concave for gains, convex for losses and generally steeper for losses, and that decision weights replace probabilities.
In Problem 1 of the 1979 paper (N = 72), 82 per cent chose B, a sure 2,400, over A, which gave 2,500 with probability .33, 2,400 with probability .66 and 0 with probability .01.
The authors report that reversing the sign of outcomes reversed the prevalent preference, and call this the reflection effect; they note that the method used hypothetical choices.
Hardie, Johnson and Fader (1993) calibrated a reference-dependent multinomial logit model on scanner data and report significant loss aversion in its coefficients.
Gal and Rucker (2018) say loss aversion is cited widely across the social sciences including law, marketing, finance and consumer psychology, describe the 1979 paper as the most cited in all of economics (citing Simonsohn, 2014), and conclude that current evidence does not support that losses, on balance, tend to be any more impactful than gains.
Mrkva and colleagues (2020), across five unique samples totalling 17,720 people, found that more domain knowledge and experience went with lower loss aversion, that people at all levels were loss averse, and they cast doubt on claims that loss aversion is a fallacy.
Kahneman shared the 2002 economics prize with Vernon Smith, and the article says Amos Tversky had died in 1996.
People involved
- Daniel Kahneman. Psychologist and co-author
- Amos Tversky. Psychologist and co-author
- David Gal. Critic of loss aversion as a general principle
- Kellen Mrkva. Lead author of a reply to the critique
In the Psy101 course
- OpenStax Psychology 2e, section 7.3: Problem SolvingChapter 7, Thinking and Intelligence. Context. Nearest related section; it does not discuss this topic by name.Covers heuristics and a table of decision biases, the nearest textbook material. It does not discuss prospect theory or loss aversion by name.
This is course relevance only. It is not evidence for the historical or corporate claims on this page.See the full course map.
Sources and inspection
6 of 6 sources were opened and read at the level shown. A source marked as not verified supports no claim on this page by itself.
- [1]Prospect Theory: An Analysis of Decision under RiskKahneman, D; Tversky, A. Econometrica 47(2), 263-292 (copy hosted at MIT), 1979. Journal article. Primary source.Relevant text checkedRead pages 263 to 268 of the hosted scan as images (abstract, introduction, critique, hypothetical-choice caveat, Problems 1 to 8, reflection effect and Table I). Later pages were not read.
- [2]Prospect Theory: An Analysis of Decision under Risk (publisher record)Tversky, A; Kahneman, D. Econometric Society, 1979. Journal article. Primary source.Abstract or publisher record onlyRead the publisher page summary of the abstract and bibliographic details (volume 47, issue 2, March 1979, pages 263 to 292).
- [3]The Loss of Loss Aversion: Will It Loom Larger Than Its Gain?Gal, D; Rucker, D. Journal of Consumer Psychology (copy hosted on statmodeling.stat.columbia.edu), 2018. Journal article. Critique or replication.Relevant text checkedRead the first two pages (abstract and introduction) of the hosted copy as images. The review of evidence in later pages was not read.
- [4]Moderating Loss Aversion: Loss Aversion Has Moderators, But Reports of its Death are Greatly ExaggeratedMrkva, K; Johnson, E; Gaechter, S; Herrmann, A. Journal of Consumer Psychology 30(3), 407-428 (copy hosted at imo.unisg.ch), 2020. Journal article. Critique or replication.Relevant text checkedRead the first two pages (abstract and the opening of the introduction) as images. Study methods and results were not read.
- [5]Modeling Loss Aversion and Reference Dependence Effects on Brand ChoiceHardie, B; Johnson, E; Fader, P. Marketing Science 12(4), 378-394 (IDEAS/RePEc record), 1993. Journal article. Secondary account.Abstract or publisher record onlyRead the abstract on the RePEc record as returned by the fetch tool. The paper itself was not opened.
- [6]Kahneman wins Nobel Prize in economics for behavioral studyDaily Princetonian staff. The Daily Princetonian, 2002. News report. Secondary account.Relevant text checkedRead the news article text as returned by the fetch tool. It names Vernon Smith as co-recipient and says Tversky died in 1996. The Nobel Foundation pages were not opened.
Access note: Prize facts rest on a contemporary news report; the Nobel Foundation pages were not opened.
Independent source review: Claude review agent, independent of the research agent, 2026-10-21. Verdict: pass-with-edits.