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nism-series-xb-behavioral-finance-loss-aversion-prospect-theory[ INVESTMENT ADVISER (LEVEL 2) ]

Under Kahneman and Tversky's Prospect Theory, what is the core behavioral finding regarding how human investors evaluate investment losses versus equivalent financial gains?

[ A ]Investors experience zero emotional pain when suffering losses.
[ B ]The psychological pain of a monetary loss is felt approximately twice as intensely as the pleasure derived from an equivalent monetary gain (Losses hurt roughly 2x more than equivalent gains).[ CORRECT ]
[ C ]Gains feel 10 times more pleasurable than equivalent losses.
[ D ]Investors are completely rational economic beings unaffected by framing.
Takeaway

Option B is correct: The psychological pain of a monetary loss is felt approximately twice as intensely as the pleasure derived from an equivalent monetary gain (Losses hurt roughly 2x more than equivalent gains).

Derivation
Prospect Theory replaces the classical assumption that a rupee lost and a rupee gained carry equal and opposite utility with an empirically observed asymmetry: the value function is concave for gains but steeper for losses of the same magnitude, so the emotional weight of losing money outpaces gaining an identical amount, by roughly a factor of two in Kahneman and Tversky's findings. This explains two well-documented investor behaviors: the disposition effect, where investors sell winning positions too early to lock in the pleasurable gain, and the tendency to hold losing positions far too long, avoiding the sharper pain of realizing the loss.
Why the others fail
A — Investors experience zero emotional pain when suffering losses.
Prospect Theory's central finding is that losses cause disproportionately strong emotional distress, directly contradicting the idea that losses cause zero pain.
C — Gains feel 10 times more pleasurable than equivalent losses.
Inverts the actual empirical asymmetry; losses are felt more intensely than equivalent gains, not the other way around as this option claims.
D — Investors are completely rational economic beings unaffected by framing.
Prospect Theory specifically demonstrates systematic irrational bias and loss aversion, contradicting the classical assumption of a fully rational, unbiased investor.