A Psychological Law of Inertia and the Illusion of Loss Aversion

The principle of loss aversion is thought to explain a wide range of anomalous phenomena involving tradeoffs between losses and gains. In this article, I show that the anomalies loss aversion was introduced to explain- the risky bet premium, the endowment effect, and the status-quo bias- are characterized not only by a loss/gain tradeoff, but by a tradeoff between the status-quo and change; and, that a propensity towards the status-quo in the latter tradeoff is sufficient to explain these phenomena. Moreover, I show that two basic psychological principles- (1) that motives drive behavior; and (2) that preferences tend to be fuzzy and ill-defined- imply the existence of a robust and fundamental propensity of this sort. Thus, a loss aversion principle is rendered superfluous to an account of the phenomena it was