People value gains and losses differently, leading to inconsistent decision-making.
Kahneman and Tversky's 1979 paper, the most cited in economics. Its two departures from expected utility are the value function's kink at the reference point and the overweighting of small probabilities.
In practice
- A firm will pay far more to avoid recognising a £2m write-down than it would to gain £2m.
- A person will take a certain small gain over a gamble, and gamble to avoid a certain small loss of the same size.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money