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, Gordon D.A. Brown

Research output: Contribution to journalArticlepeer-review

78 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)2557-2562
Number of pages6
JournalPsychological Science
Volume24
Issue number12
DOIs
Publication statusPublished - 14 Oct 2013
Externally publishedYes

Keywords

  • happiness
  • income
  • loss aversion
  • money
  • subjective well-being

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