Kahneman & Tversky's value function: reference points, diminishing sensitivity, and risk attitudes that flip.
Warming up the engine…
How people actually choose under risk: outcomes are valued as gains and losses from a reference point, losses hurt roughly twice as much as equal gains feel good, and small probabilities are overweighted.
Value function v(x): concave for gains, convex and steeper for losses (λ ≈ 2.25)
Loss aversion explains why people refuse small favourable bets, hold losing shares too long, and buy both insurance and lottery tickets. The kink at the reference point means FRAMING matters: the same outcome feels different described as a loss avoided versus a gain forgone, which standard expected-utility theory says should be impossible.
Name the three ingredients (reference dependence, loss aversion, probability weighting) and attach one behavioural anomaly to each. Kahneman and Tversky (1979) is the citation.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Also in Behavioral Economics
Current equations
You don't feel wealth, you feel CHANGES. Gains satisfy less and less as they grow; equal-sized losses hurt about twice as much. That kink at zero is loss aversionloss aversionThe finding that losses hurt roughly twice as much as equal gains feel good., the most consequential asymmetry in decision-making.
Source: Kahneman & Tversky (1979)