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

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 =...

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Bibliographic Details
Published in:Psychological science 2013-12, Vol.24 (12), p.2557-2562
Main Authors: Boyce, Christopher J., Wood, Alex M., Banks, James, Clark, Andrew E., Brown, Gordon D. A.
Format: Article
Language:English
Subjects:
Adolescent
Adult
Affect
Aged
Aged, 80 and over
Applied psychology
Biological and medical sciences
Correlation analysis
Decision making
Economic models
Economics and Finance
Female
Forecasting
Fundamental and applied biological sciences. Psychology
Germany
Happiness
Humanities and Social Sciences
Humans
Income
Male
Middle Aged
Miscellaneous
Money
Personal Satisfaction
Psychological factors
Psychology. Psychoanalysis. Psychiatry
Psychology. Psychophysiology
Quality of life
Research Report
Risk aversion
United Kingdom
Well being
Young Adult
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Summary: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.
ISSN:0956-7976
1467-9280
DOI:10.1177/0956797613496436