Money, well-being and loss aversion: does an income loss have a greater effect on well-being than an equivalent income gain?

Christopher J. Boyce, Alex M. Wood, James Banks, Andrew Clark and Gordon D.A. Brown

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Higher income is associated with greater well-being, but do income gains and losses impact on well-being differently? Loss aversion, whereby losses loom larger than gains, is typically examined with relation to decisions about anticipated outcomes. Here, using subjective well-being data from Germany (N = 28,723) and the UK (N = 20,570), we find that experienced falls in income have a larger impact on well-being than equivalent income gains. The effect is not explained by the diminishing returns to well-being of income. Our findings show that loss aversion applies to experienced losses, counteracting suggestions that loss aversion is only an affective forecasting error. Longitudinal studies of the income/well-being relationship may, by failing to take account of loss aversion, have overestimated the positive effect of income for well-being. Moreover, societal well-being may be best served by small and stable income increases even if such stability impairs long-term growth.

Keywords: loss aversion; money; income; subjective well-being (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2014-01
New Economics Papers: this item is included in nep-hap, nep-hpe and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://eprints.lse.ac.uk/57997/ Open access version. (application/pdf)

Related works:
Working Paper: Money, Well-being and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-being than an Equivalent Income Gain? (2014)
Working Paper: Money, Well-Being, and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-Being Than an Equivalent Income Gain? (2013)
Working Paper: Money, Well-Being, and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-Being Than an Equivalent Income Gain? (2013)
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