What is Diminishing sensitivity?
Diminishing sensitivity is the principle that the psychological impact of a change decreases as distance from a reference point increases. Losing $100 feels devastating when you have $200 but barely noticeable when you have $1 million. It is a core feature of prospect theory’s value function.
How it works
The value function is concave for gains (each additional dollar of gain produces less additional satisfaction) and convex for losses (each additional dollar of loss produces less additional pain). This means the difference between $10 and $20 feels larger than the difference between $1,010 and $1,020, even though both are objectively $10. The principle also applies to non-monetary domains like time, effort, and health outcomes.
Applied example
A store that raises prices from $1.00 to $1.50 (50% increase) provokes far more customer outrage than one that raises prices from $100 to $100.50 (0.5% increase), even though the absolute change is smaller in the first case.
Why it matters
Diminishing sensitivity explains why people are risk-seeking for losses and risk-averse for gains, and why pricing strategies, tax policy, and penalty structures need to account for psychological rather than absolute magnitudes.
