Money, Well-Being, and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-Being Than an Equivalent Income Gain?

Citation

Boyce CJ, Wood AM, Banks J, Clark AE & Brown GDA (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. https://doi.org/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.

Keywords
loss aversion; money; income; happiness; subjective well-being; Financial security Great Britain ; Financial security Germany ; Well-being and quality of life Great Britain ; Well-being and quality of life Germany ; Income distribution Great Britain ; Income distribution Germany

Journal
Psychological Science: Volume 24, Issue 12

People

Dr Christopher Boyce

Honorary Research Fellow, SMS Management and Support