losing $0) or Choice B (a 100% chance of losing $500). An overwhelming majority of participants chose “B” in the first scenario and "A" in the second. This suggested that people are willing to settle for an acceptable amount of earnings (despite they have a reasonable opportunity of gaining more). However, people are willing to participate in risk-seeking activities where they can reduce their losses. In a sense, people value losses more than the same amount of gains. This phenomenon is called the “asymmetric value function," which means, in short, the pain of loss outweighs the equivalent level of gain. The prospect theory can explain such phenomena as people who prefer not to deposit their money in a bank, even though they would earn interest, or people who choose not to work overtime because they would have to pay higher taxes. It also plainly underlies the disposition effect. In both situations presented to participants in Kahneman and Tversky's study, the participants sought, in risk-averse fashion, to cash in on guaranteed gains. This behavior plainly explains why investors act too soon to realize stockmarket gains. Avoiding the disposition effect The disposition effect can be minimized by means of a mental approach called "hedonic framing". For example, individuals can try to force themselves to think of a single large gain as a number of smaller gains, to think of a number of smaller losses as a single large loss, to think of the combination of a major gain and a minor loss as a net minor gain, and, in the case of a combined major loss and minor gain, to think of the two separately. In a similar manner, investors show a reversed disposition effect when they are framed to think of their investment as progress towards a specific investment goal rather than a generic investment. See also Cognitive dissonance Endowment effect Escalation of commitment Loss aversion Status quo bias References External links A list of published papers on the topic Behavioral finance Decision-making paradoxes Cognitive biases