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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.

Suggested Citation

  • Vendrik, Maarten C.M. & Woltjer, Geert, 2006. "Happiness and Loss Aversion: When Social Participation Dominates Comparison," IZA Discussion Papers 2218, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2218
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    Cited by:

    1. Ambra Poggi, 2010. "Within-establishment wage inequality and satisfaction," LABORatorio R. Revelli Working Papers Series 100, LABORatorio R. Revelli, Centre for Employment Studies.
    2. 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.
    3. Montizaan, Raymond M. & Vendrik, Maarten C.M., 2014. "Misery Loves Company: Exogenous shocks in retirement expectations and social comparison effects on subjective well-being," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 1-26.
    4. 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.
    5. Korthals Roxanne, 2012. "Selection and tracking in secondary education: A cross country analysis of student performance and educational opportunities," ROA Research Memorandum 014, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    6. 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.
    7. Andrew E. Clark & Claudia Senik, 2010. "Will GDP growth increase happiness in developing countries?," Working Papers halshs-00564985, HAL.
    8. Isabel Günther & Johannes K. Maier, 2014. "Poverty, Vulnerability, and Reference-Dependent Utility," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(1), pages 155-181, March.

    More about this item

    Keywords

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

    JEL classification:

    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • D6 - Microeconomics - - Welfare Economics

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