{"id":1060,"slug":"kahneman-tversky-prospect-theory-loss-aversion-2to1","title":"Kahneman & Tversky prospect theory (Econometrica 1979; JRU 1992) — loss aversion ratio ~2:1; fourfold pattern; certainty effect","kind":"reference","scope":"business","status":"current","audiences":["kevin","candid-team"],"topics":["psychology-aversion","behavioral-economics"],"reference_body":"**Claim:** Two canonical references:\n\n- Kahneman, D. & Tversky, A. \"Prospect Theory: An Analysis of Decision under Risk.\" *Econometrica* 47(2): 263–291 (1979).\n- Tversky, A. & Kahneman, D. \"Advances in Prospect Theory: Cumulative Representation of Uncertainty.\" *Journal of Risk and Uncertainty* 5: 297–323 (1992).\n\nEmpirical regularities established:\n\n1. **Loss aversion ratio ≈ 2:1** — losses loom roughly twice as large as equivalent gains across most studies.\n2. **Certainty effect** — people overweight outcomes they perceive as certain.\n3. **Fourfold pattern** — risk-aversion for gains of moderate-to-high probability, but risk-seeking for losses of moderate-to-high probability.\n\n**Confidence:** Verified (foundational primary literature; replication-robust).\n\n**For Candid — applied to GC marketing decisions:** The choice between (A) hire an estimator at $80K/year — felt as a known **production** expense — and (B) hire a marketing agency at $36K/year — felt as a discretionary **non-production** loss — is asymmetric not because the dollars are asymmetric but because (A) is mentally bracketed as production and (B) as non-production. **The fact that (B) is less than half of (A) is irrelevant to the loss calculation.**\n\nThe fourfold pattern also explains the otherwise-puzzling pattern of contractors gambling on **cheap last-ditch lead sources** (HomeAdvisor leads, Facebook lead-form campaigns) rather than committing to a structured marketing investment — risk-seeking for losses of moderate-to-high probability.\n\n**Related:** [[crawford-real-work-vs-marketing-probabilistic-deterministic]] gives the cultural-identity companion to the behavioral-economics explanation.","rationale_body":null,"metadata":null,"links":{"outgoing":[{"slug":"research-brief-psychology-gc-marketing-aversion-may-2026","title":"Research brief: the psychology of marketing aversion among general contractor owners (May 2026 foundation)","kind":"reference","scope":"business","link_type":"relates-to"}],"incoming":[]},"created_at":"2026-05-24T23:24:06.312Z","updated_at":"2026-05-24T23:24:06.312Z"}