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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?

Author

Listed:
  • Christopher J. Boyce

    (Behavioural Science Centre, Stirling Management School - University of Stirling, School of Psychological Sciences - University of Manchester [Manchester])

  • Alex M. Wood

    (Behavioural Science Centre, Stirling Management School - University of Stirling)

  • James Banks

    (Institute for Fiscal Studies - University of Manchester [Manchester])

  • Andrew E. Clark

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique)

  • Gordon D. A. Brown

    (University of Warwick [Coventry])

Abstract

Higher income is associated with greater well-being, but do income gains and losses affect well-being differently? Loss aversion, whereby losses loom larger than gains, is typically examined in relation to decisions about anticipated outcomes. Here, using subjective-well-being data from Germany (N = 28,723) and the United Kingdom (N = 20,570), we found that losses in income have a larger effect on well-being than equivalent income gains and that this effect is not explained by diminishing marginal benefits of income to well-being. Our findings show that loss aversion applies to experienced losses, challenging suggestions that loss aversion is only an affective-forecasting error. By failing to account for loss aversion, longitudinal studies of the relationship between income and well-being may have overestimated the positive effect of income on well-being. Moreover, societal well-being might best be served by small and stable income increases, even if such stability impairs long-term income growth.

Suggested Citation

  • Christopher J. Boyce & Alex M. Wood & James Banks & Andrew E. Clark & Gordon D. A. Brown, 2013. "Money, Well-Being, and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-Being Than an Equivalent Income Gain?," Post-Print halshs-00941907, HAL.
    • Handle: RePEc:hal:journl:halshs-00941907
    DOI: 10.1177/0956797613496436
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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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