Money, well-being and loss aversion: does an income loss have a greater effect on well-being than an equivalent income gain?

By: James Banks
Gordon D.A. Brown
Christopher J. Boyce
Alex M. Wood
Andrew E. Clark

URL: http://d.repec.org/n?u=RePEc:ehl:lserod:57997&r=ltv

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.
Keywords: loss aversion; money; income; subjective well-being
JEL: J1

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