Loss Aversion

Abstract

This chapter examines the policy implications of the various interactions between loss aversion and the law. It starts by claiming that loss aversion is not irrational per se, and that the manipulability of reference points is limited. It claims that loss aversion not only explains, but also justifies, the law’s tendency to treat losses and gains differently. The chapter further argues that although the law should not try to negate loss aversion itself, it should discourage the manipulative exploitation of people’s loss aversion by others. It endorses the use of legal default rules to steer people’s decisions in the desirable direction. The chapter also notes that loss aversion provides a prima facie argument against legal reforms. Finally, it observes that legal decision-makers are also susceptible to framing effects, and this susceptibility may be exploited by interested parties. Conscious reframing of an issue in different ways may help overcome such manipulations.

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