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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, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - ENS Paris - École normale supérieure - Paris)

  • Gordon D. A. Brown

    (Departement of Economics - University of Warwick - 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?," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00941907, HAL.
  • Handle: RePEc:hal:pseose:halshs-00941907
    DOI: 10.1177/0956797613496436
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00941907
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    References listed on IDEAS

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    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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    Cited by:

    1. 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.
    2. repec:eee:socmed:v:198:y:2018:i:c:p:103-111 is not listed on IDEAS
    3. 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.
    4. Mujcic, Redzo & Oswald, Andrew J., 2018. "Is envy harmful to a society's psychological health and wellbeing? A longitudinal study of 18,000 adults," Social Science & Medicine, Elsevier, vol. 198(C), pages 103-111.
    5. repec:eee:jjieco:v:46:y:2017:i:c:p:79-90 is not listed on IDEAS
    6. 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).
    7. repec:kap:jrisku:v:56:y:2018:i:1:d:10.1007_s11166-018-9271-9 is not listed on IDEAS
    8. Mujcic, Redzo & Oswald, Andrew J., 2018. "Is Envy Harmful to a Society's Psychological Health and Wellbeing? A Longitudinal Study of 18,000 Adults," IZA Discussion Papers 11922, Institute for the Study of Labor (IZA).
    9. repec:bla:revinw:v:64:y:2018:i:2:p:245-269 is not listed on IDEAS
    10. repec:bla:acctfi:v:58:y:2018:i:s1:p:493-527 is not listed on IDEAS
    11. Andrew E. Clark, 2018. "Four Decades of the Economics of Happiness: Where Next?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 64(2), pages 245-269, June.
    12. 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

    Keywords

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

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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