Law’s Loss Aversion

Kahneman and Tversky’s prospect theory is probably the most influential contribution to behavioral economics, and loss aversion is the most important element of this theory: Losses loom larger than gains. This chapter surveys the effect this notion has had on legal theory. It first provides an overview of the vast psychological literature on loss aversion. It then demonstrates the contribution made by studies of loss aversion in several contexts that are of particular interest to the law, including consumer behavior and litigation and settlement. The chapter further discusses the possibility of triggering loss aversion through legal framing, focusing on two examples: default rules and burden of proof. It also suggests that there is a striking correspondence between loss aversion and basic features of the law, and offers possible explanations for this correspondence. Finally, the chapter briefly discusses some of the normative implications of loss aversion for the law.