Behavioral Economics Seminar: Give me an S! Diminishing Sensitivity and Loss Aversion in Life Satisfaction

The Behavioral Economics group at IFRO invite to open seminars with a range of subjects within Behavioral Economics.

Daniel G. Mahler, PhD fellow at Department of Economics, University of Copenhagen, will present: Give me an S! Diminishing Sensitivity and Loss Aversion in Life Satisfaction

Abstract

Prospect theory and its empirical applications have shown that in narrowly framed contexts people make decisions based on the value of those choices relative to a reference point. The resulting mapping from outcomes to utility is called the value function and it exhibits diminishing sensitivity and loss aversion, which together make the value function an S-curve.

In this paper we use data on life satisfaction from the German Socio-Economic Panel (n>250,000) to test whether the properties of the value function extend from narrowly framed contexts in choice experiments to the life-as-a-whole context in experienced utility. We find that the mapping from changes in earnings to life satisfaction mimics the predicted S-curve remarkably well. This finding is robust to a large set of alternative specifications. In congruence with experimental evidence, we find that earnings losses have around 2 times greater impact on life satisfaction than earnings gains.

For further information, contact:
Catrine Jacobsen, cj@ifro.ku.dk