The Review of Loss Aversion

Abstract

Loss aversion is a cognitive bias that refers to the tendency of humans to feel the pain of a loss more strongly than the pleasure of an equivalent gain. In other words, people tend to weigh potential losses more heavily than potential gains of the same value. This bias is a part of prospect theory, a psychological theory that explains how people make decisions involving risk and uncertainty. It's important to note that loss aversion is a natural cognitive bias, and while it can lead to suboptimal decisions in some cases, it also serves as a survival mechanism. Throughout human history, avoiding losses, such as the loss of resources or safety, has been crucial for survival and reproduction. Recognizing and understanding loss aversion can help individuals make more balanced and rational decisions. This paper starts from the manifestation of loss aversion. It explains the reasons for the formation of loss aversion and the influencing factors. Moreover, this paper provides practical application scenarios for better avoidance of badness and utilization of profitability in life by speaking about loss aversion in combination with real life and investment.