Money, Well-being and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-being than an Equivalent Income Gain?
AbstractHigher 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.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Occasional Papers with number 39.
Date of creation: Jan 2014
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Loss aversion; money; income; subjective well-being;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-17 (All new papers)
- NEP-HAP-2014-01-17 (Economics of Happiness)
- NEP-HPE-2014-01-17 (History & Philosophy of Economics)
- NEP-LTV-2014-01-17 (Unemployment, Inequality & Poverty)
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