Why people seem risk aversive when gaining, and risk seeking when losing
I listened to a very good Security Keynote by Bruce Schneier where he mentions an experiment where people prefer getting $1000 with certainty before having a 50% chance of getting $2000, while at the same time they prefer to lose $2000 at a 50% chance before losing $1000 with certainty.
The strange thing, it is said, is that people seem to be risk averse for gains, and risk seeking for losses.
However, if you simply see people's valuation of money as non-linear, the paradox goes away: It does not hurt twice as much to lose $2000, and it doesn't make you twice as happy to gain $2000. Hence the behavior of most humans is rational.
One can see it as humans valuing the status quo, since they have built a cognitive framework around it, and any deviations from it will mean a re-planning. Getting extra resources will only force you to re-plan if the amount is significant, hence higher rewards have less value. Even a small loss will trigger re-planning and a big loss will do the same.
There might be more to the Kahneman and Tversky work, but as presented by Schneier, non linearity is enough to explain the behavior.
One very important result of Kahneman and Tversky work is demonstrating that people's attitudes toward risks concerning gains may be quite different from their attitudes toward risks concerning losses. For example, when given a choice between getting $1000 with certainty or having a 50% chance of getting $2500 they may well choose the certain $1000 in preference to the uncertain chance of getting $2500 even though the mathematical expectation of the uncertain option is $1250. This is a perfectly reasonable attitude that is described as risk-aversion. But Kahneman and Tversky found that the same people when confronted with a certain loss of $1000 versus a 50% chance of no loss or a $2500 loss do often choose the risky alternative. This is called risk-seeking behavior. This is not necessarily irrational but it is important for analysts to recognize the asymmetry of human choices.