Boyce, Christopher J., Wood, Alex M., Banks, James, Clark, Andrew E. and 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?
CEP Occasional Papers (CEPOP39).
The London School of Economics and Political Science, Center of Economic Performance, London, UK.
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.
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