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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. and Wood, Alex M. and Banks, James and Clark, Andrew E. and Brown, Gordon D.A. (2013) Money, well-being, and loss aversion: does an income loss have a greater effect on well-being than an equivalent income gain? Psychological Science, 24 (12). pp. 2557-2562. ISSN 0956-7976

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Identification Number: 10.1177/0956797613496436

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.

Item Type: Article
Official URL: http://pss.sagepub.com/
Additional Information: © 2013 Association for Psychological Science
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HV Social pathology. Social and public welfare. Criminology
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 02 Sep 2014 11:26
Last Modified: 02 Sep 2014 11:26
URI: http://eprints.lse.ac.uk/id/eprint/59337

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