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

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

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.

Suggested Citation

  • Boyce, Christopher J. & Wood, Alex M. & Banks, James & Clark, Andrew E. & Brown, Gordon D.A., 2014. "Money, well-being and loss aversion: does an income loss have a greater effect on well-being than an equivalent income gain?," LSE Research Online Documents on Economics 57997, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:57997
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    More about this item

    Keywords

    loss aversion; money; income; subjective well-being; RES-062-23-2462; ES/K002201/1;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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