Economics Loss Aversion Questions
Loss aversion influences decision-making under uncertainty by causing individuals to place a higher value on avoiding losses compared to acquiring gains. This bias leads individuals to be more risk-averse when faced with uncertain outcomes, as the fear of potential losses outweighs the potential gains. As a result, individuals may make suboptimal decisions by avoiding risky choices even when the potential benefits outweigh the potential losses. Loss aversion can also lead to a reluctance to let go of investments or assets that have incurred losses, as individuals tend to hold onto them in the hope of recovering their initial investment. Overall, loss aversion plays a significant role in shaping decision-making under uncertainty by influencing individuals to prioritize avoiding losses over maximizing gains.