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Summary.
In 1979, psychologists Daniel Kahneman and Amos Tversky famously posited that losses loom larger than gains in human decision-making. For example, a dollar of loss affects our behavior more than a dollar of profits. Likewise, when a firm announces losses, its stock price declines more dramatically than it increases for the same dollar amount of profits. Investors abandon and lenders tend to stop financing loss-making firms, which then start restructuring their business lines and laying off employees. Some firms go even further, conducting M&A transactions without substance and “managing earnings” to report profits instead of a loss.