{"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":[{"slug":"brown-imai-vieider-camerer-2024-meta-analysis-lambda-1955","title":"Brown, Imai, Vieider, Camerer (JEL 2024) — meta-analysis of 607 loss-aversion estimates; mean λ = 1.955, CI [1.820, 2.102]","kind":"reference","scope":"business","link_type":"relates-to"},{"slug":"tversky-kahneman-1992-probability-weighting-certainty-effect","title":"Tversky & Kahneman 1992 (JRU) — cumulative prospect theory; probability weighting w(p); certainty effect","kind":"reference","scope":"business","link_type":"relates-to"},{"slug":"fourfold-pattern-risk-preferences-gc-cognitive-signature","title":"Fourfold pattern of risk preferences — the cognitive signature observed in GC sales conversations","kind":"reference","scope":"business","link_type":"depends-on"},{"slug":"koszegi-rabin-2006-reference-dependent-preferences","title":"Köszegi & Rabin 2006 (QJE) — reference-dependent preferences; the reference point is endogenous","kind":"reference","scope":"business","link_type":"relates-to"},{"slug":"overconfidence-in-house-comparator-pattern-for-gc-pitches","title":"The \"my nephew can build it\" pattern — loss-aversion on the invoice + overconfidence on in-house execution as mechanistically linked","kind":"reference","scope":"business","link_type":"depends-on"},{"slug":"rule-price-in-affordable-loss-terms-not-expected-return","title":"R1 — Price and scope in affordable-loss terms, not expected-return terms; headline = \"maximum you can lose,\" not \"projected upside\"","kind":"rule","scope":"business","link_type":"depends-on"},{"slug":"why-in-group-dominates-three-compounding-mechanisms","title":"Why in-group reputation dominates market reputation for trades — credence-good + loss-aversion + low-frequency selection compound","kind":"reference","scope":"business","link_type":"depends-on"}]},"created_at":"2026-05-24T23:24:06.312Z","updated_at":"2026-05-24T23:24:06.312Z"}