City Research Online

Abstract

We use an annual household panel to conduct a comparative analysis of which decision theory explains life satisfaction better. We consider expected utility theory and prospect theory. We consider the effects of three domains on life satisfaction: income, health, and (un)employment. Using a fixed effects estimator we find that life satisfaction contains features of both expected utility theory and prospect theory. However, the elements of expected utility theory are stronger predictors of life satisfaction. Life satisfaction depends positively on income, good health, and employment. It also depends positively on income and employment improvements, however the reverse is true for health improvements. Life satisfaction is concave in income gains and convex in income losses, and it exhibits loss aversion in income and employment status, but not in health. The results suggest that life satisfaction is best described by expected utility theory, but also contains some aspects of prospect theory.

Publication Type:	Article
Additional Information:	This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
Publisher Keywords:	Life satisfaction, Prospect theory, Loss aversion
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HM Sociology H Social Sciences > HN Social history and conditions. Social problems. Social reform
Departments:	School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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