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Happiness and Loss Aversion: When Social Participation Dominates Comparison

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  • Vendrik, Maarten C.M.

    ()
    (Maastricht University)

  • Woltjer, Geert

    ()
    (Maastricht University)

Abstract

A central finding in happiness research is that a person’s income relative to the average income in her social reference group is more important for her life satisfaction than the absolute level of her income. This dependence of life satisfaction on relative income can be related to the reference dependence of the value function in Kahneman and Tversky’s (1979) prospect theory. In this paper we investigate whether the characteristics of the value function like concavity for gains, convexity for losses, and loss aversion apply to the dependence of life satisfaction on relative income. This is tested with a new measure for the reference income for a large German panel for the years 1984-2001. We find concavity of life satisfaction in positive relative income, but unexpectedly strongly significant concavity of life satisfaction in negative relative income as well. The latter result is shown to be robust to extreme distortions of the reported-life-satisfaction scale. It implies a rising marginal sensitivity of life satisfaction to more negative values of relative income, and hence loss aversion (in a wide sense). This may be explained in terms of increasing financial obstacles to social participation.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2218.

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Length: 36 pages
Date of creation: Jul 2006
Date of revision:
Publication status: published in: Journal of Public Economics, 2007, 91 (7-8), 1423-1448
Handle: RePEc:iza:izadps:dp2218

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Keywords: loss aversion; value function; relative income; life satisfaction; social participation;

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Citations

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Cited by:
  1. repec:hal:wpaper:halshs-00564985 is not listed on IDEAS
  2. Montizaan, Raymond & Vendrik, Maarten C.M., 2012. "Misery Loves Company: Exogenous Shocks in Retirement Expectations and Social Comparison Effects on Subjective Well-Being," IZA Discussion Papers 6863, Institute for the Study of Labor (IZA).
  3. Verme, Paolo, 2013. "The relative income and relative deprivation hypotheses : a review of the empirical literature," Policy Research Working Paper Series 6606, The World Bank.
  4. Vendrik, Maarten C.M. & Woltjer, Geert B., 2007. "Happiness and loss aversion: Is utility concave or convex in relative income?," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1423-1448, August.
  5. Carol Newman & Liam Delaney & Brian Nolan, 2008. "A Dynamic Model of the Relationship Between Income and Financial Satisfaction: Evidence from Ireland," The Economic and Social Review, Economic and Social Studies, vol. 39(2), pages 105-130.
  6. Poggi, Ambra, 2013. "Within-establishment wage inequality and satisfaction," Economics Discussion Papers 2013-28, Kiel Institute for the World Economy.
  7. G.nther, Isabel & Maier, Johannes, 2013. "Poverty, vulnerability, and reference dependent utility," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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