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Loss aversion is an affective forecasting error.

Deborah A Kermer1, Erin Driver-Linn, Timothy D Wilson

  • 1University of Virginia, USA. dkermer@virginia.edu

Psychological Science
|August 18, 2006
PubMed
Summary
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People overestimate the emotional impact of losses compared to gains. This research reveals that our predictions about loss aversion are often inaccurate due to biased forecasting of emotional responses.

Area of Science:

  • Behavioral Economics
  • Psychology
  • Decision Science

Background:

  • Loss aversion describes the tendency for people to prefer avoiding losses over acquiring equivalent gains.
  • The psychological impact of losses is often perceived as greater than that of gains.

Purpose of the Study:

  • To investigate the accuracy of affective forecasts regarding losses and gains.
  • To examine whether the predicted hedonic impact of losses differs from their experienced emotional impact.

Main Methods:

  • Two studies were conducted using a gambling task.
  • Participants predicted the emotional impact of potential losses and gains.
  • Participants then engaged in the gambling task to experience the outcomes.

Main Results:

Related Experiment Videos

  • Participants predicted losses would have a greater hedonic impact than equivalent gains.
  • Actual gambling experiences showed that losses had less emotional impact than predicted.
  • Individuals underestimated their ability to rationalize losses and overestimated their tendency to dwell on them.

Conclusions:

  • The asymmetrical impact of losses and gains is more pronounced in affective forecasts than in actual affective experience.
  • Cognitive biases in forecasting, such as rationalization and dwelling, contribute to overestimating the impact of losses.
  • Understanding these forecasting biases is crucial for accurately predicting emotional responses to financial and other outcomes.