24 Oct 2014Working Paper Summaries

Individual Experience of Positive and Negative Growth Is Asymmetric: Global Evidence from Subjective Well-being Data

by Jan-Emmanuel De Neve, George W. Ward, Femke De Keulenaer, Bert Van Landeghem, Georgios Kavetsos and Michael I. Norton

Are individuals more sensitive to losses than gains in macroeconomic growth? The authors analyze subjective well-being data drawn from three large data sets to investigate whether economic downturns are associated with decreases in individual well-being that are significantly larger than increases in well-being from equivalent upswings. The authors argue that public policy discussions focusing on the benefits of economic growth often overlook and should consider the psychological toll that recessions may create. Key concepts include:

Individuals experience losses more acutely than gains in a macroeconomic setting.
Recession years are significantly associated with losses in well-being.
The question whether people are more sensitive to losses than equivalent gains in economic growth relates to the famous behavioral finding on individual loss aversion that underpins prospect theory (Kahneman and Tversky, 1979).

Author Abstract

Are individuals more sensitive to losses than gains in macroeconomic growth? Using subjective well-being measures across three large data sets, we observe an asymmetry in the way positive and negative economic growth are experienced, with losses having more than twice as much impact on individual happiness as compared to equivalent gains. We use Gallup World Poll data drawn from 151 countries, Behavioral Risk Factor Surveillance System (BRFSS) data taken from a representative sample of 2.5 million U.S. respondents, and Eurobarometer data that cover multiple business cycles over four decades. This research provides a new perspective on the welfare cost of business cycles with implications for growth policy and our understanding of the long-run relationship between GDP and subjective well-being.