Tversky and Kahneman (1991) present a reference-dependent model of consumer choice that explains how loss aversion influences decisions. The theory posits that preferences are shaped by a reference point, and losses have a greater impact on preferences than equivalent gains. This leads to an asymmetric S-shaped value function, where gains and losses are evaluated differently. The model is applied to riskless choices, where the value function has three key properties: reference dependence, loss aversion, and diminishing sensitivity. The paper discusses empirical evidence supporting loss aversion, including the endowment effect, status quo bias, and differences in evaluating improvements versus trade-offs. The endowment effect is demonstrated through experiments where individuals value items more highly when they own them. The status quo bias is shown through experiments where people prefer to retain their current options. The model also explains how people evaluate gains and losses differently, leading to asymmetric preferences. The paper also introduces the concept of reference dependence, where preferences depend on a reference state. It defines loss aversion as the tendency to value losses more heavily than equivalent gains. The model is extended to include diminishing sensitivity, where the marginal value of gains and losses decreases with their size. The paper provides empirical estimates of the coefficient of loss aversion, finding it to be approximately two. The implications of loss aversion are discussed, including its impact on economic behavior, such as the disparity between the willingness to accept and pay for goods. The paper also addresses the normative status of loss aversion, noting that while it may seem irrational, it is a reflection of the asymmetry between pain and pleasure. The analysis concludes that loss aversion is a fundamental aspect of human decision-making and has significant implications for economic theory and policy.Tversky and Kahneman (1991) present a reference-dependent model of consumer choice that explains how loss aversion influences decisions. The theory posits that preferences are shaped by a reference point, and losses have a greater impact on preferences than equivalent gains. This leads to an asymmetric S-shaped value function, where gains and losses are evaluated differently. The model is applied to riskless choices, where the value function has three key properties: reference dependence, loss aversion, and diminishing sensitivity. The paper discusses empirical evidence supporting loss aversion, including the endowment effect, status quo bias, and differences in evaluating improvements versus trade-offs. The endowment effect is demonstrated through experiments where individuals value items more highly when they own them. The status quo bias is shown through experiments where people prefer to retain their current options. The model also explains how people evaluate gains and losses differently, leading to asymmetric preferences. The paper also introduces the concept of reference dependence, where preferences depend on a reference state. It defines loss aversion as the tendency to value losses more heavily than equivalent gains. The model is extended to include diminishing sensitivity, where the marginal value of gains and losses decreases with their size. The paper provides empirical estimates of the coefficient of loss aversion, finding it to be approximately two. The implications of loss aversion are discussed, including its impact on economic behavior, such as the disparity between the willingness to accept and pay for goods. The paper also addresses the normative status of loss aversion, noting that while it may seem irrational, it is a reflection of the asymmetry between pain and pleasure. The analysis concludes that loss aversion is a fundamental aspect of human decision-making and has significant implications for economic theory and policy.