Loss aversion predicts status quo preference even without risk

Evidence

An important consequence of loss aversion is a preference for the status quo over alternatives with the same expected value. For example, most people are reluctant to accept a bet that offers equal odds of winning and losing x number of dollars. This reluctance is consistent with loss aversion, which implies that the pain associated with the loss would exceed the pleasure associated with the gain, or v(x)<−u(−x). This observation, however, is also consistent with the concavity of the utility function, which implies that the status quo (i.e., the prospect yielding one’s current level of wealth with certainty) is preferred to any risky prospect with the same expected value. These accounts can be discriminated from each other because in utility theory the greater impact of losses than of gains is tied to the presence of risk. In the present analysis, however, loss aversion also applies to riskless choice. — John T. Jost and Jim Sidanius, Political Psychology, 2446

Categorization

• DEFINE: Clarifies how loss aversion in prospect theory differs from standard utility concavity: utility ties loss-aversion to risk, while prospect theory applies it to riskless multattribute choice.
• XREF: connects to: Trading folklore and managers directly counteract prospect theory’s loss-aversion bias — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1202