“Money, Well-Being, and Loss Aversion”

[Economic Psychology]

Do the negative psychological consequences of a pay cut differ in magnitude than the positive psychological consequences of a pay raise? Researchers haves shown that people tend to be loss averse. That is, people anticipate losses, in money for example, will have greater negative effects than an equally sized gain will have positive effects. While a significant body of research demonstrates the effect anticipated losses or gains have on anticipated well-being, a recent study, published in Psychological Science, Boyce et. al set out to examine the actual effects of pay cuts and pay raises on actual psychological well-being. Boyce et al. utilized two large, longitudinal, national datasets from German and British Households to compare changes in income to changes in subjective well-being. The researchers found that actual raises and cuts in income have similar psychological effects as anticipated raises and cuts, and thereby provide the first evidence that the concept of loss aversion applies to both anticipated and actual experience. Thus, a lower income, if stable, may be better for psychological well-being than a higher, but less stable one. Such findings have significant sociopolitical implications, as small reductions in national income levels, for example, may negate the increases in subjective well-being that a nation’s inhabitants receive from overall income growth.

 

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