Economics Loss Aversion Questions
Prospect theory is a behavioral economic theory that suggests individuals make decisions based on potential gains and losses rather than on final outcomes. Loss aversion is a key concept within prospect theory, which states that individuals tend to feel the pain of losses more strongly than the pleasure of equivalent gains. In other words, people are more motivated to avoid losses than to acquire equivalent gains. This asymmetry in the way losses and gains are perceived leads individuals to take more risks to avoid losses and to be more risk-averse when it comes to potential gains. Overall, loss aversion plays a significant role in shaping decision-making behavior under prospect theory.