The article "Loss Aversion in Riskless Choice: A Reference-Dependent Model" by Amos Tversky and Daniel Kahneman explores the phenomenon of loss aversion in consumer choice, particularly in riskless contexts. The authors argue that choices are influenced by a reference point, which can lead to reversals in preference when the reference point is shifted. They introduce a reference-dependent theory of consumer choice, where indifference curves are deformed around the reference point. The central assumption of this theory is that losses and disadvantages have a greater impact on preferences than gains and advantages. This loss aversion is characterized by a steeper negative slope in the value function compared to the positive domain, and diminishing sensitivity, meaning that the marginal value of gains and losses decreases with their size. The authors review empirical evidence supporting loss aversion, including the endowment effect, where people value objects more highly when they own them, and the status quo bias, where people tend to prefer maintaining the status quo over changing it. They also discuss how loss aversion can affect trade-offs and improvements versus tradeoffs, and introduce the concept of decomposable reference functions to model constant loss aversion. The article concludes by discussing the implications of loss aversion for economic behavior, such as the disparity between the willingness to accept (WTA) and the willingness to pay (WTP) for goods, and its impact on negotiations, fairness judgments, and labor market dynamics.The article "Loss Aversion in Riskless Choice: A Reference-Dependent Model" by Amos Tversky and Daniel Kahneman explores the phenomenon of loss aversion in consumer choice, particularly in riskless contexts. The authors argue that choices are influenced by a reference point, which can lead to reversals in preference when the reference point is shifted. They introduce a reference-dependent theory of consumer choice, where indifference curves are deformed around the reference point. The central assumption of this theory is that losses and disadvantages have a greater impact on preferences than gains and advantages. This loss aversion is characterized by a steeper negative slope in the value function compared to the positive domain, and diminishing sensitivity, meaning that the marginal value of gains and losses decreases with their size. The authors review empirical evidence supporting loss aversion, including the endowment effect, where people value objects more highly when they own them, and the status quo bias, where people tend to prefer maintaining the status quo over changing it. They also discuss how loss aversion can affect trade-offs and improvements versus tradeoffs, and introduce the concept of decomposable reference functions to model constant loss aversion. The article concludes by discussing the implications of loss aversion for economic behavior, such as the disparity between the willingness to accept (WTA) and the willingness to pay (WTP) for goods, and its impact on negotiations, fairness judgments, and labor market dynamics.