Loss aversion theory assumes that people set a reference point when making risky decisions. This can be either a desired target value or the status quo. If the current value is then below the previously defined reference point, this is perceived as a loss. Consequently, it is a win if the value is above the reference value.
The scientists' finding that the curves in the area of losses are concave (= curved inward) is particularly interesting. In the case of the wins, however, the curve is convex (= curved outward). From this it can be deduced that the perception of pain rises steeply in the case of losses. It can also be said that losses are consequently valued more highly than, for example, previously earned wins.
Accordingly, the majority of people experience a significantly more unpleasant feeling when they lose 50 euros than when they win the same amount. Furthermore, scientists have found out that with increasing winnings, the subjective benefit noticeably flattens. Example: If a gambler wins two million euros, he is not necessarily more pleased than if he wins one million euros.
In the area of losses, the scientists found that a loss of, say, 100 euros weighs heavily. However, those who have already lost 500 euros in advance are better able to cope with an additional loss of 100 euros. Accordingly, the theory of loss aversion shows that gamblers become increasingly Risk-averse in the face of heavy losses. In contrast, gamblers who are in the winning zone tend to be more risk averse.
Ultimately, loss aversion theory is evidence that gambling should not be viewed as an investment or a way to make money, but rather as pure entertainment. After all, in the big picture, the wins earned will always bring less pleasure than the pain of the losses. The theory of loss aversion can be traced back to the psychologists Daniel Kahneman and Amos Tversky.