Loss aversion, which indicates that negative changes (losses) have greater impact than the equivalent positive changes (gains), is one of the basic elements of Prospect Theory. Loss aversion was considered an influential and pervasive behavior bias on individual decision making and introduced as an explanatory principle of some behavior anomalies such as the endowment effect and stock premium.
Researchers have promoted the following two general accepted interpretations of
loss aversion: the subjective utility-based asymmetry and the affect-based asymmetry between gains and losses. However, both interpretations neglected one premise of money exchange, that is, the gains were usually one-route with the transition from not having to having a possession, whereas the losses were typically two-route, with another transition from having to not having. Thus, in our previous research, loss aversion was hypothesized due to the uneven routes of gains and losses.
However, the route-based account was challenged with situations, where the gain has one route and the loss has two routes, whereas the degrees of loss aversion are different. The present paper further explores why individuals are loss aversion by interpreting the perception of ability to realize the loss as a mediator between the routes and loss aversion while comparing the route-based account with the affect-based asymmetry (additive or subtractive logic) and subjective probability-based asymmetry accounts.
Three studies were designed to test the mediation effect of the perception of ability to realize the loss between the routes and loss aversion.Study 1 was intended to interpret the loss aversion scenario which can be explained by the simple route-based account. Moreover, the differences of loss aversion in the tax scenario, which is "three-route gain vs. two-route loss", and money scenario, which is "one-route gain vs. two-route loss", can be mediated by the perception of ability to realize the loss. The three sub studies of Study 2 were designed to test whether or not the perception of ability to realize the loss can interpret the loss aversion phenomena,which cannot be explained by the simple route-based account. These phenomena include the magnitude effect, resource effect, and own effect. Furthermore, Study 3 explored that the individuals' honest-humility strait can moderate the mediation effect of the perception of ability to realize the loss on the magnitude effect of loss aversion.
The present paper pit route-based account was compared with the affect-based asymmetry (additive or subtractive logic) and subjective probability-based asymmetry accounts. The results corroborated that the perception of ability to realize the loss,which was considered the mechanism of the route-based account, may provide a promising explanation for the observed loss aversion. The implications of these findings for tax policy-making and social reform were discussed.