Loss aversion, instead, is state dependence that makes you feel worse about state X if you came from state X+1, and better about it if you came from state X-1 (assuming X is, say, wealth).
It seems to me that "loss aversion" might be reconstituted as "utility hysteresis" to avoid the ambiguity.
I would say that, at least academically, the difference between 'diminishing marginal utility' and 'loss aversion' is appreciated. To quote course material, 'When directly compared against each other, losses loom larger than gains'.
The difference in perception on the gain and loss side has been tested some, and the curve is supposed to look like this: https://goo.gl/PS8Z7c
Yet all the psychological studies will show that said person HATES losing $100 much more than they like gaining $100. It's a major effect.
Heck, if you even give people the same amount of money but FRAME it as a loss versus a gain, people change their behavior. The marginal utility is identical!
Loss aversion is MUCH larger than any difference in marginal utility. It's a real thing, that has huge effects on our politics, our economics, our media and our entire lives.
TL;DR: Article writer has absolutely no idea what he is talking about.
You give an example where DMU doesn't explain the phenomenon, so we can see loss aversion. He might be happy to accept your example. But that doesn't mean that in general you don't have to point out that they're distinct, because your case is rather extreme.
If you come by and swipe a quarter off my desk, I'm going to be way more pissed than if you came by my desk and left a quarter.
The delta of my being pissed is way bigger than the DMU of +/- $.25, or my feeling if I'd parted ways with that $.25 in a variety of other manners.
I don't know if what I'm experiencing is or isn't "loss aversion". But it's not "just DMU".
This is an important distinction. In my experience, people equate "loss aversion" with "unwilling departure of money" and "windfall" -- i.e. being unwilling to be swindled or ripped off.
Civilization depends on an equilibrium where I don't steal your property, and you do not steal mine. Civilization flourishes when everyone is in the cooperate-cooperate quadrant of the prisoner's dilemma. When someone steals from you, they have violated this very basic principle. If you accept this defection without responding, then they will likely only defect more in the future. Thus maintaining the equilibrium requires you to respond harshly to even small defections.
If there is a difference, then the order of events has impact beyond the initial/end states.
It's interesting how these (especially pertaining behavioral economics and behavioral studies in general) create compound ideas from combinations of various fundamental ideas. Sometimes, it adds value. Other times, it simply obfuscates the truth.
Consider racism. Most (or at least much) of the time it's really just a more salient and specific version of the 'in-group bias'. And I'd argue that on an academic level, researching and discussing it as the latter is vastly preferable to using the much more loaded concept of racism. But on a societal level it perhaps makes sense that we treat 'racism' as a category in itself.
Personally I think discussing whether x is 'just' a subset of y is less valuable than carefully delineating the contexts in which we use particular terms. For example, I wish that on a societal level we'd consider 'innate' differences a bit of a taboo, but that on an academic level we could go wild researching, say, IQ differences of particular populations without it being coopted by politically motivated individuals.
I vaguely recall Steven Pinker (almost?) making that argument in The Blank Slate, and even though I've never read Anathem, I understand one theme is the idea of having academics locked up and doing research similar to orders of monks isolating themselves from the world.
At the risk of this becoming (even more of) a ramble, I can't help but wonder what effect our increasing interconnectedness and the inability to do something in isolation has on all of this.
For instance, if you state that (paraphrasing) racism is wrapped up in 'in-group bias' and it turns out that people are actually racist because of something in our DNA (similar to being afraid of spiders) or something like that (NB: completely contrived, to provide context related to your comment), the you would have lost the truth in a higher abstraction layer, by hiding the underlying principle.
Now, abstraction is a helpful tool, but it should be used to abstract things to the level necessary to convey an exact message. Einstein might have said, "Abstract things as high and low as necessary, while preserving the truth, but no higher or lower."... but in the meantime, I made that quote up.
Take, for instance, my "Anchoring" example. There are more fundamental things that are going on beneath the "Anchoring" abstraction. Perhaps a specific part of the human psyche, which is also responsible for recognizing patterns (e.g., Reticular Activating System) is also responsible for the mental constructs that lead to such a cognitive bias. But, once that science is understood sufficiently enough to be trusted, a concept like "Anchoring" is a helpful delineation.
In the aforementioned case of racism that I contrived, the abstraction layer of "racism" and the perceived lower level abstraction "in-group bias" hides the truth, and this fallacious abstraction actually becomes, as Noam Chomsky might suggest, a part of our mental grammar, which prevents us from ever learning the truth, unless the abstraction is broken in our minds.
A- take a person and promise her a substantial reward against completing a set of tasks. Measure stress level during tasks execution
B- take a person and give her the substantial reward up-front, but take back part of the reward for each task she fails. Measure stress level during tasks execution.
Ariely experiments showed stress was significantly higher with subjects that were in Experiment B. So much so that one of the subjects took the money and ran away by jumping out of a window. Ariely attributed the difference in stress levels to "Aversion to loss".
There is a difference between the scenario depicted by the experiments, and the cases in the OP's article. IN the article the author compares DMU as it changes from, say, 10K->2K vs 10K->18K, and argues that the latter has less impact than the former. Whereas in Ariely's experiments it is really comparing 2K-10K vs 10K-2K and showing that even if the Delta is the same, and both points are the same, subjects still experienced a different level of emotional distress due a visceral aversion to loss.
Also, recouping a loss is far more satisfying than an equivalent windfall, and DMU completely fails to explain that.
The two may be the same, if you believe in (or talk about) subjective utility. But I think subjective utility is a terrible concept to begin with, so better not to go that route.
The change in utility by going from 2k up to 10k (~ +1.3) is significantly more than the change in utility by going from 18k down to 10k (~ -0.55).
In the simple model provided the change in utility caused by a change in wealth, positive or negative, depends on your starting wealth. This is different to the "pop definition" of loss aversion, which seems to be making a claim that the ratio of the change in utility between gains and losses is approximately independent of your starting point.
I should point out that I don't know what the correct formulation of loss aversion is, it just seems to me that the argument presented is a bit weak.
Let U be a concave utility function, and let 'w' and 'e' be some amount of 'wealth'. Concavity implies:
U(w+e)/2 + U(w-e)/2 <= U(w)
hence
U(w+e) + U(w-e) <= 2*U(w)
rearranging the terms we find
(U(w+e) - U(w)) + (U(w-e) - U(w)) <= 0
and therefore
U(w+e) - U(w) <= U(w) - U(w-e).
So gains add less utility than losses remove.
