Loss Aversion and Reference Points

Comparisons and perceptions of gains and losses are judged from an individual or social reference point. Gains and losses have a different emotional impact. A loss has a much stronger negative impact than an equivalent gain has a positive impact. People take more risk to avert a loss than to reach a gain. The value function of prospect theory explains these differences and the motivational effects of comparisons, gains, and losses in financial behavior. Hedonic framing is strategic aggregation of segregation of gains and losses to ameliorate the outcome.