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Abstract:

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CEP Occasional Paper
Money, Well-being and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-being than an Equivalent Income Gain?
Christopher J. Boyce, Alex M. Wood, James Banks, Andrew E. Clark and Gordon D.A. Brown January 2014
Paper No' CEPOP39:
Full Paper (pdf)

JEL Classification: D03; D31; I31


Tags: loss aversion; money; income; subjective well-being

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.