Abstract
Prospect theory and its empirical applications have shown that in some
contexts people make choices 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 loss aversion and diminishing sensitivity. These
properties make the value function an S-curve with a kink at the reference
point. In this paper, we use the German Socio-Economic Panel (n > 250; 000)
to test whether the properties of the value function extend from narrow gambling choices in experiments to yearly changes in earnings evaluated with life satisfaction. We nd that the mapping from changes in earnings to life satisfaction mimics the predicted S-curve remarkably well when the reference
point is generated from individuals' past earnings. This nding is robust to
a large set of alternative specications. In congruence with experimental evidence,
we nd that earnings losses have around 2 times greater impact on life
satisfaction than earnings gains. We emphasize that the S-curve we nd need
not be causal, since the changes in earnings were based on observational data.
However, we can rule out that certain other factors produced the observed
relationship, including expected utility theory.
Originalsprog | Engelsk |
---|---|
Antal sider | 41 |
Status | Udgivet - 2017 |
Emneord
- Det Samfundsvidenskabelige Fakultet