Loss Aversion, from the Prospective of Stock Market, Consumer

Market and Educational Field

Xueting Chen

School of Finance, Nanjing Audit University, Nanjing, 210000, China

Keywords: Loss Aversion, Stock Market, Consumer Market, Educational Field.

Abstract: Loss aversion is a key concept in behavioral economics, refers to the tendency for people to feel that a real or

potential loss is more emotionally or psychologically painful than an equivalent gain. Loss aversion, as a

cognitive bias, is widely present in the economic and educational fields, making important influences on

individual decision-making. This research paper presents a comprehensive exploration of this effect and its

diverse applications in three significant areas:limiting stock market participation, leading people to make

suboptimal decisions, and making positive effects on education outcomes. This paper aims to integrate

theoretical and empirical research from the economy and education fields to conduct an in-depth analysis of

the impact of loss aversion in the stock market, consumer market, and education, as well as the mechanisms

that give rise to these effects. By enhancing the understanding of the causes and impacts of loss aversion, it

is hoped that people can reduce the irrational influences of loss aversion on decision-making and amplify the

positive motivational effects of loss aversion in educational field.

1 INTRODUCTION

Loss aversion is a key concept in behavioral

economics. In short, loss aversion refers to the

tendency for people to feel the pain of losses more

strongly than the joy of equivalent gains. This idea,

highlights that people tend to make decisions that

minimize losses, even if such behavior causes them to

miss out on potential benefits. In both social and

economic areas, loss aversion has a significant impact

on decision-making behavior.

In both social and economic areas, loss aversion

has a significant impact on investors to be overly

cautious, avoiding high-risk opportunities even if they

could yield higher returns. This conservative approach

may make people miss investment opportunities, for

this reason, loss aversion limits stock market

participation. On a societal level, loss aversion can

also influence choices in work and life. For example,

employees might stay in a job they dislike simply out

of fear of losing their current position, even though a

new opportunity might offer better personal growth.

In policy-making and social welfare, people ’ s

resistance to change can be driven by a fear of

potential losses, often overlooking the long-term

benefits of reform. Understanding and leveraging loss

aversion can help policymakers and businesses design

improve incentive system, ultimately fostering

healthier social and economic development.

This paper aims to explore the role of loss aversion

in three fields: stock market, education, and consumer

market. By examining the three fields, the study

demonstrates the significant consequences of loss

aversion in social and economic settings. This analysis

can enable people to make more rational decisions

when making choices. Through delving deeper into

loss aversion, individuals and organizations can make

more rational decisions by being consciously aware of

the influence of loss aversion on their thinking.

Therefore, the negative impact of loss aversion on

irrational decision-making will be reduced and the

role of loss aversion in promoting development in

some fields will be amplified. Loss aversion has had a

profound impact on the fields of economics and

behavioral economics, and it has substantial

implications for real economic activities.

2 DEFINITION OF LOSS

AV E R S I O N

Loss aversion is a core concept in behavioral

economics, describing the strong aversion individuals

feel when faced with potential losses. It was initially

760

Chen, X.

Loss Aversion, from the Prospective of Stock Market, Consumer Market and Educational Field.

DOI: 10.5220/0014280100004942

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 2nd International Conference on Applied Psychology and Marketing Management (APMM 2025), pages 760-764

ISBN: 978-989-758-791-7

introduced by Kahneman and Tversky in their 1979

Prospect Theory framework (Kahneman et al., 1991).

In simple terms, loss aversion refers to an

individual’s sensitivity and vigilance toward risky

decisions that may result in loss. In the context of this

study, a person can be defined as exhibiting loss

aversion if they are averse to symmetric bets (where

the probability of gaining or losing an equal amount

is the same) and if this aversion increases as the size

of the stakes grows.

In the original Prospect Theory, loss aversion is

represented by a utility function that is steeper for

losses than for gains. This implies that the aversion to

loss is not only reflected in the utility value of the loss

itself but also in the psychological impact of the loss

relative to the gain. In Cumulative Prospect Theory

(CPT), loss aversion is represented by both the

weighting function and the utility function. The

weighting function in CPT accounts for the non-linear

nature of probabilities, which makes the

manifestation of loss aversion more complex.

Schmidt and Zank further introduced the concept

of “Strong Loss Aversion” which provides a more

flexible definition of loss aversion, extending beyond

symmetric bets (Schmidt & Zank, 2005). Strong loss

aversion emphasizes that, all other factors being

equal, individuals are more likely to choose lottery

options with smaller gains and losses, regardless of

other outcomes.

Building on Schmidt and Zank ’ s work, the

definition of loss aversion highlights the

psychological significance of losses relative to gains

and how this preference leads individuals to avoid

losses rather than pursue gains when making

decisions. This concept is not only theoretically

significant but also plays a crucial role in explaining

phenomena that traditional choice theories cannot.

3 CAUSE OF LOSS AVERSION

Loss aversion, as a central concept in behavioral

economics and decision theory, describes the intense

aversion and avoidance behavior individuals exhibit

when faced with potential losses. It is evident in

various aspects of society, making a profound

understanding of loss aversion significant. Many

specialized studies have explored the origins of loss

aversion.

From a psychological perspective, loss aversion

may stem from human risk preferences and value

judgments. As Kahneman and Tversky stated in their

1979 Prospect Theory, loss aversion is a key factor

driving decision-making under uncertainty

(Kahneman et al., 1991). It describes how individuals

tend to overestimate the significance of losses relative

to equal gains, regardless of the level of risk.

Research shows that loss aversion significantly

influences risk-related decisions, and this effect is

consistent across individuals, regardless of the type of

risk involved.

Neuroscientific research has further uncovered

the biological basis of loss aversion. The occurrence

of loss aversion is linked to the activation of specific

brain regions, particularly those that respond strongly

to losses, such as the anterior insular cortex and the

temporoparietal junction (Li et al., 2024). These

regions play a crucial role in decisions involving

potential losses. Loss aversion is associated with

increased activity in brain areas responsible for

processing losses, including the anterior insular

cortex, right striatum, dorsal anterior cingulate cortex,

and bilateral parietal lobes, with the intensity of brain

region activity negatively correlating with the degree

of loss aversion.

Social and cultural factors also play a significant

role in the formation of loss aversion. Individuals

from different social and cultural backgrounds exhibit

varying degrees of sensitivity to loss. For example,

collectivist cultures, which emphasize group

harmony and unity, may heighten individuals’

sensitivity to social norms and others’ opinions,

leading to higher levels of loss aversion. In such

cultures, individuals may be more inclined to follow

social norms to avoid the potential loss of deviating

from group decisions.

In conclusion, the formation of loss aversion is

influenced by psychological, physiological, and

sociocultural factors across multiple levels.

4 THE APPLICATION OF LOSS

AVERSION IN STOCK

MARKET, CONSUMER

MARKET AND EDUCATION

4.1 Loss Aversion in Stock Market

Loss aversion describes the intense aversion and

vigilance humans experience when faced with

potential losses. This psychological phenomenon

manifests in the stock market as an excessive

sensitivity and aversion to downward risks. Previous

have found that a stronger sense of loss aversion

suppresses household participation in the stock

market and reduces the proportion of household

wealth allocated to stocks. This suggests that loss

Loss Aversion, from the Prospective of Stock Market, Consumer Market and Educational Field

761

aversion, as a cognitive bias, directly influences

household financial decisions, potentially causing

them to miss out on stock market premiums and

thereby affecting potential returns (Chen & Lu,

2024).

At the same time, the impact of loss aversion

varies across households with different economic

conditions. Low-income households, due to their

weaker risk tolerance, are more significantly affected

by loss aversion, which further limits their ability to

generate wealth through the stock market.

Some scholars have also explored the impact of

loss aversion on the stock market by constructing

simulated stock trading models (Bertella et al., 2020).

In these models, which include both fundamental

investors and chart analysts, it was found that

introducing a small number of chart analysts leads to

higher stock returns, along with increased volatility

and kurtosis, which aligns with real stock market

behavior. When 5% of chart analysts exhibited loss

aversion, trading volume significantly decreased,

even though these investors held more stocks and

adopted a “buy and hold” strategy to reduce losses.

This behavior suggests that loss aversion may lead

investors to be more cautious, reduce trading activity,

and thus influence stock market liquidity and price

stability.

Loss aversion offers a new perspective on the

study of the stock market, playing an important role

in understanding irrational behavior, market

volatility, and other aspects of stock market

dynamics. For example, some financial institutions

are already trying to use this factor to improve

policies (van Dolder & Vandenbroucke, 2024). Loss

aversion also highlights the significant impact of loss

aversion on human decision-making when facing

uncertain decisions involving potential losses in the

stock market.

4.2 Loss Aversion in Consumer Market

Loss aversion also has a significant impact on the

consumer market, especially in price-sensitive

markets. Research has found that in the gasoline retail

market, when consumers face price changes, their

search behavior is significantly influenced by loss

aversion (Castilla & Haab, 2010). Consumers

typically evaluate current prices based on expected

prices. When the price exceeds expectations,

consumers perceive a loss, as it means they have to

pay more than anticipated. This feeling of loss drives

them to search more for lower prices to compensate

for the difference. In the study, when prices were

2.5% higher than expected, the probability of

consumers searching was significantly higher

compared to when prices were 5% higher than

expected. Conversely, when the price is lower than

expected, consumers perceive a gain, as it means they

can purchase the product at a price below their

expectation. This feeling of gain reduces their

motivation to continue searching, as they have

already secured a better deal than expected. In the

study, when the price was 2.5% lower than expected,

only a few consumers chose to continue searching.

Researchers found that loss aversion leads to

asymmetric search behavior in the consumer market.

Consumers are more likely to search when facing a

loss, but are more likely to stop searching when

facing a gain. This behavior affects both consumers'

purchasing decisions and price competition in the

market.

In the real estate market, research has found that

when housing prices decline, property sellers, due to

loss aversion, tend to set asking prices higher than the

market value in order to reduce the sense of loss. Data

from the Boston condominium market indicates that

sellers facing a loss set the asking price between 25%

and 35% of the difference between the expected

selling price and the original purchase price

(Genesove & Mayer, 2001). Because sellers are

unwilling to accept selling prices below the purchase

price, many properties are withdrawn from the

market, leading to a reduction in the number of

properties available for trade. This behavior affects

the supply and demand balance in the real estate

market, as well as the market's price liquidity and

transaction volume.

Overall, loss aversion in the consumer market

leads to price adjustment asymmetry and irrational

trading behavior, which has a significant impact on

the stability and efficiency of the market.

4.3 Loss Aversion in Education

Loss aversion offers new insights into teacher

incentive mechanisms. Traditional teacher incentive

programs typically operate within a rewards

framework, where bonuses are given based on

students' performance at the end of the academic year.

However, the effectiveness of this approach has been

less than ideal. Research has found that by leveraging

the psychological effect of loss aversion—prepaying

the bonus and requiring teachers to return part of it if

students perform poorly — it is possible to

significantly improve students' academic

performance (Fryer et al., 2012). A field experiment

conducted at a school in Highland, Chicago, revealed

that the teacher incentive program based on loss

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aversion led to an increase in students' math scores by

0.201 to 0.398 standard deviations, which is

equivalent to the effect of improving teacher quality

by more than one standard deviation.

A study with over 6,000 kids in elementary and

high school in Chicago to see how losing something

might affect their math test scores (Levitt et al.,

2016). The study had two groups. In the "loss" group,

students got $20 or a trophy before their test. The

students were told they would have to give it back if

their scores did not get better. In the "gain" group,

students did not get anything at first. But they were

told they'd get a reward if their scores improved. The

study found that the "loss" group did better on their

math tests. It turns out that being afraid of losing

something can make students try harder and get better

scores.

So, using loss aversion can offer teachers effective

strategies and make students more responsive to

rewards, which can lead to better results in school

overall.

5 CONCLUSION

This paper delves into an intriguing exploration of the

loss aversion, an important concept in behavioral

economics established by Kahneman, Knetsch, and

Thaler. The exploration includes a comprehensive

examination of the loss aversion across various

domains - stock market, consumer market and

educational fields. In research on loss aversion's

impact in the stock market, studies using data from

the China Household Finance Survey or constructing

simulated stock trading models have found that loss

aversion can significantly limit stock market

participation. Loss aversion makes investors in the

stock market overly cautious, causing them to miss

out on potential opportunities. A thorough

understanding of loss aversion in the stock market can

help investors make more rational decisions.

In the consumer market segment, the investigation

focuses on certain suboptimal choices. It examines

these choices from two perspectives, one is the

perspective of consumers, and the other is the

perspective of market sellers. Through experiments

on consumers' search behavior for oil prices and

experiments on real estate sellers' pricing, this part

elucidates the asymmetry often observed in

transactions. Loss aversion combined with the

asymmetries in transactions leads to suboptimal

choices. It highlights the need for consumers and

sellers to recognize the role of the loss aversion in

driving these suboptimal choices. Recognizing these

factors can help enhance the stability and efficiency

of the consumer market.

In the study of the impact of loss aversion on the

field of education, new insights are provided for

incentive mechanisms from the perspectives of both

teachers and students. Traditional incentive

mechanisms typically operate within a rewards

framework, which has proven to be less than ideal.

This study proposes that incentive mechanisms

should operate within a loss framework. The research

results show that both students and teachers, due to

the cognitive bias of loss aversion, demonstrate better

educational outcomes under a loss framework. A

proper understanding of the role of loss aversion in

incentive mechanisms is conducive to enhancing

educational effectiveness.

This paper provides a comprehensive study of the

loss aversion, drawing conclusions across a variety of

sectors - from stock market to consumer market and

educational field. This investigation reveals the

profound impact of this cognitive bias on the

economic decisions and its influence on real-world

applications, highlighting the significance of

comprehending and utilizing it effectively. The

findings are indeed compelling, yet they also raise

intriguing questions and open up avenues for future

research, urging people to further explore the

complexity and context-specific nature of loss

aversion. In the end, this study represents a significant

stride towards understanding the loss aversion,

providing fresh insights and considerations that are

valuable for both the theoretical understanding and

practical applications in the economic field.

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