What are the cognitive biases associated with loss aversion?

Loss aversion is a cognitive bias in which individuals tend to strongly prefer avoiding losses over acquiring gains of equal value. This bias can lead to several cognitive biases, including:

1. Endowment effect: Loss aversion can lead individuals to overvalue what they already possess. They tend to place a higher value on items they own compared to identical items they do not own.

2. Sunk cost fallacy: Loss aversion can also lead to the sunk cost fallacy, where individuals continue investing in a project or decision even if it is no longer rational, simply because they have already invested time, money, or effort into it.

3. Status quo bias: Loss aversion can create a bias towards maintaining the current state of affairs, even if alternative options may be more beneficial. People tend to stick with what they already have to avoid the potential loss associated with change.

4. Framing effect: Loss aversion can influence decision-making based on how choices are presented or framed. Individuals are more likely to take risks when choices are framed in terms of potential gains, but become risk-averse when choices are framed in terms of potential losses.

5. Narrow framing: Loss aversion can lead to narrow framing, where individuals focus only on the potential loss or gain of a single decision, rather than considering the broader context or long-term consequences. This can result in suboptimal decision-making.

6. Regret aversion: Loss aversion can also lead to regret aversion, where individuals avoid making decisions that may lead to regret, even if those decisions have the potential for greater gains. This bias can prevent individuals from taking necessary risks or pursuing opportunities.

Overall, loss aversion can significantly impact decision-making and lead to biases that may not always align with rational economic behavior. Understanding these cognitive biases associated with loss aversion is crucial for economists and policymakers to design effective strategies and interventions.