City Research Online

Abstract

We use an annual household panel to test whether a number of findings in behavioural economics can be supported by measures of life satisfaction and other variables. We test the following hypotheses: life satisfaction is increasing and concave in income gains; life satisfaction is decreasing and convex in income losses; changes in income, health, and employment are evaluated against a reference point; loss aversion applies to income, health and employment; recalled or expected life satisfaction is anchored at current life satisfaction and adjusted in the direction of the recall or expectation. Using a fixed effects estimator, we find that life satisfaction is increasing and concave in income gains, decreasing and convex in income losses, influenced by both the levels of income, health and employment, as well as their changes compared to the previous year. Moreover, we find that current levels of life satisfaction are better predictors of remembered (expected) life satisfaction than past (future) life satisfaction. The results provide support for prospect theory, anchoring and adjustment, and raise doubts about using the status quo as the correct reference point.

Publication Type:	Monograph (Working Paper)
Publisher Keywords:	life satisfaction, prospect theory, recall bias, anchoring and adjustment
Departments:	School of Policy & Global Affairs > Economics

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