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

Journal article: 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.

Author(s)

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

Journal
  • Psychological Science
Date of publication
  • 2013
Keywords
  • Loss aversion
  • Money
  • Income
  • Happiness
  • Subjective well-being
Pages
  • 2557-2562
Version
  • 1
Volume
  • 24