The concept of loss aversion is based on people’s reluctancy or fear to give up something that they currently possess, even if they would gain something more valuable in return. It can further be epitomized as losses looming larger than gains (Kahnem
an & Tversky, 1976). The explanation for this phenomenon lies in the fact that the psychological distress of losing is about twice as strong as the satisfaction of gaining. This often entails that people are likely to take more risk to avoid loss than they would to acquire a gain (Schindler & Pfattheicher, 2017).
Common phenomena related and/or caused by loss aversion are the endowment effect, i.e. overvaluing an asset once you acquire ownership of it, the sunk cost fallacy, i.e. conceding more losses due to an initial loss made, and the staus quo bias, i.e. people preferring things to stay the same.
Loss aversion is a common behavioral economic term and explains why penalties are oftentimes more effective than rewards. Therefore, it is important to be aware of your workforce’s loss aversion when designing a remuneration policy, to avoid the negative effects of loss aversion.
Sources:
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291
Schindler, S., & Pfattheicher, S. (2017). The frame of the game: Loss-framing increases dishonest behavior. Journal of Experimental Social Psychology, 69, 172-177.