A psychological law of inertia and the illusion of loss aversion

By David Gal. Judgment and Decision Making, 2005

172 citations recorded by the source corpus.

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 introduced to explain.

Subfields: Economics and Econometrics, Finance, General Decision Sciences

View Paper: https://www.semanticscholar.org/paper/047a65191a213aab6b92143740dfc3a453cca2b2

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Moira Nicolson
2. Stephan Lewandowsky
3. David Shipworth
4. Ben R. Newell
5. Gesche M. Huebner
6. Naomi Oreskes

In Finance

1. Moira Nicolson
2. David Shipworth
3. Gesche M. Huebner

In General Decision Sciences

1. Moira Nicolson
2. Stephan Lewandowsky
3. David Shipworth
4. Ben R. Newell
5. Gesche M. Huebner
6. Gerd Gigerenzer

Citations in the corpus

• Seepage: Climate change denial and its effect on the scientific community (2015, background): “Second, people generally have a strong preference for the current state of affairs over change, a tendency known as the status quo bias (e.g., Eidelman and Crandall, 2012; Gal, 2006; Roca and Maule, 2009).”
• Are consumers willing to switch to smart time of use electricity tariffs? The importance of loss-aversion and electric vehicle ownership (2017, background): “…Kahneman and Tversky in 1979 [27–29] and Herbert Simon [30], some environmental economists have proposed that people do not just fail to make optimal decisions because of market failures but because they are not rational decision-makers who evaluate costs and benefits like economist do [24,31–34].”
• Individual-level loss aversion in riskless and risky choices (2022, unknown): “Our data and results provide novel input into a debate about whether loss aversion is a real phenomenon (Ert & Erev, 2013; Gal, 2006; Gal & Rucker, 2018; Plott & Zeiler, 2005; Yechiam, 2019), which some even called a ‘‘fallacy’’ (Gal, 2018).”
• Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence (2014, unknown): “(7)Gal (2006) suggests that inertia may be an equally valid explanation for many phenomena attributable to loss aversion.”
• The Loss of Loss Aversion: Will It Loom Larger Than Its Gain? (2018, unknown): “Nonetheless, Gal (2006) found that more than 85% chose to retain their original quarter.”