The belief that losses loom larger than gains is practically enshrined in investing and social science research. So when researchers from the University of Illinois at Chicago and Northwestern University reviewed a poll of those attending the 2016 Society for Judgment and Decision Making Conference in Boston, the results were not surprising. When asked if losses loom larger than gains, 96% of those affirmed the consensus opinion: yes, losses do loom larger than gains. This notion may not be entirely accurate, says new research. What might seem like a simple statement is actually filled with nuance and is really contextual?

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

If loss always looms larger than gain, how are risky investments explained?

If loss always loomed larger than gain, would risk ever be taken at anything? Why do some people cliff dive or even invest in the stock market or trade commodities if loss avoidance was so much more powerful than potential gain?

When the University of Illinois at Chicago Professor David Gal and Northwestern University Professor Derek Rucker look at the overwhelming consensus wisdom regarding the concept that losses are avoided more than gains, they consider the sweeping statement and start to think of the many nuanced variables that surround the concept.

Noting a “relative lack of attention to the pleasure of gaining” in academic research, Gal and Rucker set out to conduct research that considers a variety of situational variables under which the generalization that loss looms larger than gain might be challenged.  “Current evidence does not support that losses, on balance, tend to be any more impactful than gains.”

Their research concludes that at times loss aversion is more prominent than the potential for gain, but this decision-making process, much like University of Chicago Nobel Prize winner Richard Thaler’s behavioral economics, is more situational and may be subject to individualized nuance.

Their work does not seek to discredit or dismiss previous research, but rather look deeper into the situational nuance.

Our proposition is that the overgeneralization of loss aversion risks obfuscation of the psychological processes that are associated with losses and gains, and, thereby, leads to neglect of the idea that gains can also loom psychologically larger than losses, or, in other cases that gains and losses will have similar psychological impact. Indeed, a greater focus on understanding the psychological processes associated with losses and gains and their contextual moderators may increase scientific inquiry and complexity in a way that allows greater precision in the prediction of human behavior. Thus, perhaps ironically, if this potential is realized, the loss of loss aversion might loom larger than its gain.

Loss aversion is contextual, not universal

To develop their thesis, the researchers dissect the construct of loss aversion, noting differing patterns of behavior that are more often contextual. Then they review existing evidence which they say “does not support that losses, on balance, tend to be any more impactful than gains” while they examine the question of why the consensus generally accepts the notion that losses loom larger than gains in all instances “despite evidence to the contrary.”

The author’s main conclusion is that “evidence does not support a general tendency for losses to be more psychologically impactful than gains (i.e., loss aversion).” They say at times losses will loom larger than gains, but other times gains loom larger than losses. There is not a yes or no answer to the question: do losses loom larger than gains? The answer should be: it depends on the circumstance.

Read the full report: Gal, David and Rucker, Derek, The Loss of Loss Aversion: Will It Loom Larger Than Its Gain? (September 30, 2017). Journal of Consumer Psychology, Forthcoming. Available at SSRN: