I don’t think you read the author right. He is not saying that loss aversion is explained by diminishing marginal utility, he’s saying precisely the contrary.
I mean...he quotes Kahneman; claiming the guy doesn’t know the implications of his own theory.
Losses hurt more than gains even at scales where DMU predicts that they should not. (because your DMU curve is approximately flat for small losses and gains) Loss aversion is the psychological result which explains this effect.
This is the author’s conclusion:
“So, please, don’t go around claiming that behavioral economists are incorporating some brilliant newfound insight that people hate losses more than they like gains. We’ve known about this in price theory since Alfred Marshall’s 1890 Principles of Economics.”
Sorry nope. Alfred Marhall’s Principles would have made the wrong prediction.
I don’t think you read the author at all. The whole post is about structural qualitative differences between “people hate losses more than they like gains” (DMU) and loss aversion. He is not saying DMU explain loss aversion. He is not saying Alfred Marshall’s Principles would have made the right prediction. What he is saying is that loss aversion is much less intuitive than the pop science version of loss aversion.
I read him, he is just incorrect. “People hate losses more than they hate gains” is not explained by DMU. They dislike losses to an extent far greater than predicted by DMU, and more importantly, this dislike is largely scale invariant.
If you go read papers like the original K&T, you’ll see that their data set is just a bunch of statements that are predicted to be equally preferrable under DMU (because marginal utility doesn’t change much for small changes in wealth). What changes the preference is simply whether K&T phrase the question in terms of a loss or a gain.
So...unsurprisingly, Kahneman is accurately describing the theory that won him the Nobel prize.
The author explain very clearly what the differences are between “people hate losses more than they like gains” and loss aversion. Loss aversion is people hating losing $1 while having $2 more than they like gaining $1 while having $1, even though it both case this the difference between having $1 and $2.