A psychological law of inertia and the illusion of loss aversion

• Main Author: David Gal
• Format: Article
• Language: English
• Published: Society for Judgment and Decision Making 2006-07-01
• Series: Judgment and Decision Making
• Subjects: inertia; loss aversion; endowment effect; status-quobias; risky choice; reference-dependent preferences
• Online Access: http://journal.sjdm.org/jdm06002.pdf

The principle of loss aversion is thought to explain a wide range of anomalous phenomena involving tradeoffs between losses and gains. In this article, I show that the anomalies loss aversion was introduced to explain --- the risky bet premium, the endowment effect, and the status-quo bias --- are characterized not only by a loss/gain tradeoff, but by a tradeoff between the status-quo and change; and, that a propensity towards the status-quo in the latter tradeoff is sufficient to explain these phenomena. Moreover, I show that two basic psychological principles --- (1) that motives drive behavior; and (2) that preferences tend to be fuzzy and ill-defined --- imply the existence of a robust and fundamental propensity of this sort. Thus, a loss aversion principle is rendered superfluous to an account of the phenomena it was