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

CEP Occasional Papers from Centre for Economic Performance, LSE

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: D03 D31 I31 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-hap, nep-hpe and nep-ltv
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Citations: View citations in EconPapers (2)

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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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