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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?


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


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.

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  • 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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    References listed on IDEAS

    1. Di Tella, Rafael & Haisken-De New, John & MacCulloch, Robert, 2010. "Happiness adaptation to income and to status in an individual panel," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 834-852, December.
    2. Betsey Stevenson & Justin Wolfers, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 1-102.
    3. Layard, R. & Mayraz, G. & Nickell, S., 2008. "The marginal utility of income," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1846-1857, August.
    4. Paul Frijters & John P. Haisken-DeNew & Michael A. Shields, 2004. "Money Does Matter! Evidence from Increasing Real Income and Life Satisfaction in East Germany Following Reunification," American Economic Review, American Economic Association, vol. 94(3), pages 730-740, June.
    5. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
    6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    7. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
    8. 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.
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    1. Money, well-being and loss aversion: does an income loss have a greater effect on well-being than an equivalent income gain?
      by maximorossi in NEP-LTV blog on 2015-02-20 22:53:34


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    1. repec:eee:jjieco:v:46:y:2017:i:c:p:79-90 is not listed on IDEAS
    2. Zheng Fang & Yoko Niimi, 2015. "Do Losses Bite More than Gains? Evidence from a Panel Quantile Regression Analysis of Subjective Well-being in Japan," Economic Growth Centre Working Paper Series 1507, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    3. Johnston, David W. & Shields, Michael A. & Suziedelyte, Agne, 2015. "Victimisation, Wellbeing and Compensation: Using Panel Data to Estimate the Costs of Violent Crime," IZA Discussion Papers 9311, Institute for the Study of Labor (IZA).
    4. Caroline J. Charpentier & Jan-Emmanuel De Neve & Jonathan P. Roiser & Tali Sharot, 2016. "Models of Affective Decision-making: How do Feelings Predict Choice?," CEP Discussion Papers dp1408, Centre for Economic Performance, LSE.
    5. Mujcic, Redzo & Oswald, Andrew J, 2018. "Is Envy Harmful to a Society’s Psychological Health and Wellbeing? A Longitudinal Study of 18,000 Adults," The Warwick Economics Research Paper Series (TWERPS) 1154, University of Warwick, Department of Economics.
    6. Andrew E. Clark & Conchita D’Ambrosio, 2017. "Living conditions and well-being: Evidence from African countries," WIDER Working Paper Series 209, World Institute for Development Economic Research (UNU-WIDER).

    More about this item


    loss aversion; money; income; subjective well-being;

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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