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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. 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.

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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.

Item Type: Monograph (Report)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2014 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 18 Jul 2014 09:13
Last Modified: 19 Nov 2019 16:14
Projects: PTA-026-27-2665, RES-062-23-2462, ES/K002201/1, R01AG040640
Funders: Economic and Social Research Council, University of Stirling, U.S. National Institute of Aging
URI: http://eprints.lse.ac.uk/id/eprint/57997

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