The Role of Magnitude in Loss Aversion

Loss aversion-the tendency to avoid losses-has been one of the fundamental ideas in decision research across psychology and behavioral economics. Building upon the general notion of bad being stronger than good and on prospect theory's value function, the statement "losses loom larger than gains" became accepted as a fundamental principle of human behavior. However, the possibly important role of the magnitude of stakes in the psychological valuation process has not been formally considered, though it is a salient aspect in both theoretical and empirical terms. To fill that gap, we review various studies before and after prospect theory and find evidence that underscores the role of magnitude in loss aversion. Magnitude-dependent loss aversion is a nuanced proposition that explicitly foregrounds the role of stake size in the psychological valuation of gains versus losses.