Editing Loss aversion (section)

== Prospect theory ==
{{Main|Prospect theory}}

Loss aversion is part of prospect theory, a cornerstone in behavioral economics.  The theory explored numerous behavioral biases leading to sub-optimal decisions making.<ref name=":1" /> Kahneman and Tversky found that people are biased in their real estimation of probability of events happening. They tend to over-weight both low and high probabilities and under-weight medium probabilities.<ref name=":0" /><ref name=":1" /><ref name=":2">{{Cite book |last=Kahneman |first=David |title=Thinking, Fast and Slow |publisher=Farrar, Straus, and Giroux |year=2013 |isbn=978-0-374-53355-7 |location=New York |pages=10, 48, 119, 242–244, 271, 282–286, 289–299, 415–417}}</ref>

One example is which option is more attractive between option A ($1,500 with a probability of 33%, $1,400 with a probability of 66%, and $0 with a probability of 1%) and option B (a guaranteed $920). Prospect theory and loss aversion suggests that most people would choose option B as they prefer the guaranteed $920 since there is a probability of winning $0, even though it is only 1%. This demonstrates that people think in terms of expected utility relative to a reference point (i.e. current wealth) as opposed to absolute payoffs.<ref name=":1" /><ref name=":2" /><ref>{{cite journal | last=Barberis | first=Nicholas C | title=Thirty Years of Prospect Theory in Economics: A Review and Assessment | journal=Journal of Economic Perspectives | publisher=American Economic Association | volume=27 | issue=1 | date=1 February 2013 | issn=0895-3309 | doi=10.1257/jep.27.1.173 | doi-access=free | pages=173–196}}</ref> When choices are framed as risky (i.e. risk losing 1 out of 10 lives vs the opportunity to save 9 out of 10 lives), individuals tend to be loss-averse as they weigh losses more heavily than comparable gains.<ref name=":1" />