Loss aversion is not what you think it is

Loosely related, A Better Explanation Of The Endowment Effect

Phrasing this in terms of utility functions is misleading. I suggest thinking in terms of a Schelling Point strategy, as David Friedman describes in his account of why property rights exist. Most utility functions will generate strategies such as this under many conditions.

As Patrick said, loss aversion is present on the scales small enough for the DMU to not matter. Slightly more mathematically, when, given the utility function x->U(x), the gain vs loss utility ratio for the same change in the argument is small: Δx << U'(x)/U"(x). It does not invalidate the author's point though, that there exists a phenomenon that is better described as the utility hysteresis: one ends up with less utility after gaining 2x and then losing x than after just gaining x.

The validity of the author's point seems to depend on what is the best way to interpret the phrase "losses hurt more than equivalent gains". Two ways that you could interpret it in which it would be a consequence of loss aversion but not of DMU:

• "Having your wealth decrease from X to Y decreases your satisfaction more than having your wealth increase from Y to X increases it."
• "The pain of a small loss is significantly more than the pleasure of a small gain."

It seems to me that most of the quotes at the end, if you interpret them charitably, mean something like the above. So the post seems like a nitpick to me. It's great to explain the difference between loss aversion and DMU for people who don't necessarily know about them, but it's not clear to me that it means that the quoted people were actually wrong about something.

I would also disagree with point #3, e.g. the last sentence of the Economist quote seems valid as an intuitive explanation of loss aversion but not of DMU.

In short, the author is wrong. Diminishing marginal utility only really applies when the stakes are on the order of the agent’s total wealth, whereas the loss aversion asymmetry holds true for relatively small sums.