Accessible Unlicensed Requires Authentication Published by De Gruyter March 22, 2021

Adaptation and Loss Aversion in the Relationship Between GDP and Subjective Well-Being

Matti Hovi and Jani-Petri Laamanen


We examine the roles of macro-level adaptation — including social comparison effects becoming more important over time — and macroeconomic loss aversion in the time-series relationship between national income and subjective well-being. Models allowing for these phenomena are applied to cross-country panel data. We find evidence for macroeconomic loss aversion that becomes more important over time: the effects of economic growth become small and statistically insignificant in the long run, whereas the effects of contractions are large and long-lasting. The results are consistent with the Easterlin paradox and point to it being explained by macro-level adaptation to economic growth. Our results highlight the importance of allowing for both dynamics to distinguish long-run from short-run effects and asymmetries to recognize the important effects of contractions. Failing to do the former leads to a misleading impression of the long-run relationship between economic growth and well-being.

JEL Classification: O11; I31

Corresponding author: Jani-Petri Laamanen, Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland, E-mail:

Funding source: Finnish Cultural Foundation

Award Identifier / Grant number: 00170305


We would like to thank Petteri Juvonen, Arto Luoma, Tuomas Malinen, Elias Oikarinen, Jari Vainiomäki, and the participants of the Nordic Conference on Behavioral and Experimental Economics in Tampere and the HEIRS conference in Rome and seminar participants in Helsinki, Jyväskylä, Tampere and Turku for helpful comments and discussions. Financial support from the Finnish Cultural Foundation (grant number 00170305) is gratefully acknowledged.


Blanchflower, D. G. 2007. “Is Unemployment More Costly than Inflation?” National Bureau of Economic Research working paper, no. w13505, 2007: 1–40, Search in Google Scholar

Bloom, D. E., D. Canning, R. K. Mansfield, and M. Moore. 2007. “Demographic Change, Social Security Systems, and Savings.” Journal of Monetary Economics 54: 92–114, Search in Google Scholar

Boyce, C. J., A. M. Wood, J. Banks, A. E. Clark, and G. D. Brown. 2013. “Money, Well-Being, and Loss Aversion: Does an Income Loss Have a Greater Effect on Well-Being Than an Equivalent Income Gain?” Psychological Science 24: 2557–62, Search in Google Scholar

Bruno, G. S. 2005. “Approximating the Bias of the LSDV Estimator for Dynamic Unbalanced Panel Data Models.” Economics Letters 87: 361–6, Search in Google Scholar

Clark, A. E. 2016. “Adaptation and the Easterlin Paradox.” In Advances in Happiness Research, edited by T. Tachibanaki, 75–94. Tokyo: Springer. Search in Google Scholar

Clark, A. E. 2018. “Four Decades of the Economics of Happiness: Where Next?” Review of Income and Wealth 64: 245–69, Search in Google Scholar

Clark, A. E., E. Diener, Y. Georgellis, and R. E. Lucas. 2008a. “Lags and Leads in Life Satisfaction: A Test of the Baseline Hypothesis.” The Economic Journal 118: F222–43, Search in Google Scholar

Clark, A. E., P. Frijters, and M. A. Shields. 2008b. “Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles.” Journal of Economic Literature 46: 95–144, Search in Google Scholar

Clark, A. E., C. D’Ambrosio, and S. Ghislandi. 2015. “Poverty Profiles and Well-Being: Panel Evidence from Germany.” In Measurement of Poverty, Deprivation, and Economic Mobility. Bingley: Emerald Group Publishing Limited. Search in Google Scholar

Clark, A. E., C. D’Ambrosio, and S. Ghislandi. 2016. “Adaptation to Poverty in Long-Run Panel Data.” The Review of Economics and Statistics 98: 591–600, Search in Google Scholar

D’Ambrosio, C., and J. R. Frick. 2012. “Individual Wellbeing in a Dynamic Perspective.” Economica 79: 284–302. Search in Google Scholar

De Neve, J.-E., G. Ward, F. De Keulenaer, B. Van Landeghem, G. Kavetsos, and M. I. Norton. 2018. “The Asymmetric Experience of Positive and Negative Economic Growth: Global Evidence Using Subjective Well-Being Data.” The Review of Economics and Statistics 100: 362–75, Search in Google Scholar

Di Tella, R., R. J. MacCulloch, and A. J. Oswald. 2003. “The Macroeconomics of Happiness.” The Review of Economics and Statistics 85: 809–27, Search in Google Scholar

Di Tella, R., and R. MacCulloch. 2008. “Happiness Adaptation to Income beyond Basic Needs.” National Bureau of Economic Research working paper, no. w14539, 2008: 1–30, Search in Google Scholar

Di Tella, R., J. Haisken-De New, and R. MacCulloch. 2010. “Happiness Adaptation to Income and to Status in an Individual Panel.” Journal of Economic Behavior & Organization 76: 834–52, Search in Google Scholar

Easterlin, R. A. 1974. “Does Economic Growth Improve the Human Lot? Some Empirical Evidence.” In Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, 89–125. New York: Academic Press. Search in Google Scholar

Easterlin, R. A. 2009. “Lost in Transition: Life Satisfaction on the Road to Capitalism.” Journal of Economic Behavior & Organization 71: 130–45, Search in Google Scholar

Easterlin, R. A. 2013. “Happiness, Growth, and Public Policy.” Economic Inquiry 51: 1–15, Search in Google Scholar

Easterlin, R. A. 2016. “Paradox Lost?” USC-INET Research Paper: 16–02. Search in Google Scholar

Eberhardt, M., and A. F. Presbitero. 2015. “Public Debt and Growth: Heterogeneity and Non-linearity.” Journal of International Economics 97: 45–58, Search in Google Scholar

Frijters, P., D. W. Johnston, and M. A. Shields. 2011. “Life Satisfaction Dynamics with Quarterly Life Event Data.” The Scandinavian Journal of Economics 113: 190–211, Search in Google Scholar

Graham, C., and M. Nikolova. 2015. “Bentham or Aristotle in the Development Process? an Empirical Investigation of Capabilities and Subjective Well-Being.” World Development 68: 163–79, Search in Google Scholar

Hovi, M. 2020. “The Lasting Well-Being Effects of Early Adulthood Macroeconomic Crises.” Tampere Economic Working Papers 123: 1–31. Search in Google Scholar

Hovi, M., and J.-P. Laamanen. 2016. “Mind the Gap? Business Cycles and Subjective Well-Being.” Applied Economics Letters 23: 1206–9, Search in Google Scholar

Judson, R. A., and A. L. Owen. 1999. “Estimating Dynamic Panel Data Models: A Guide for Macroeconomists.” Economics Letters 65: 9–15, Search in Google Scholar

Kahneman, D., and A. Deaton. 2010. “High Income Improves Evaluation of Life but Not Emotional Well-Being.” Proceedings of the National Academy of Sciences 107, 16489–93, Search in Google Scholar

Kahneman, D., J. L. Knetsch, and R. H. Thaler. 1991. “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” The Journal of Economic Perspectives 5: 193–206, Search in Google Scholar

Kahneman, D., and A. Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47: 363–91, Search in Google Scholar

Kaiser, C. 2020. “People Do Not Adapt. New Analyses of the Dynamic Effects of Own and Reference Income on Life Satisfaction.” Journal of Economic Behavior & Organization 177: 494–513, Search in Google Scholar

Kaiser, C. F., and M. C. Vendrik. 2019. “Different Versions of the Easterlin Paradox: New Evidence for European Countries.” In The Economics of Happiness, 27–55. Cham: Springer. Search in Google Scholar

Kiviet, J. F. 1995. “On Bias, Inconsistency, and Efficiency of Various Estimators in Dynamic Panel Data Models.” Journal of Econometrics 68: 53–78, Search in Google Scholar

Köszegi, B., and M. Rabin. 2006. “A Model of Reference-dependent Preferences.” Quarterly Journal of Economics 121: 1133–65, Search in Google Scholar

Nickell, S. 1981. “Biases in Dynamic Models with Fixed Effects.” Econometrica 68: 1417–26, Search in Google Scholar

Roodman, D. 2009. “A Note on the Theme of Too Many Instruments.” Oxford Bulletin of Economics & Statistics 71: 135–58, Search in Google Scholar

Schorderet, Y. 2001. “Revisiting Okun’s Law: An Hysteretic Perspective.” unpublished manuscript, University of California San Diego. Search in Google Scholar

Schorderet, Y. 2003. “Asymmetric Cointegration.” unpublished manuscript, University of Geneva. Search in Google Scholar

Shin, Y., B. Yu, and M. Greenwood-Nimmo. 2014. “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear Ardl Framework.” In Econometric Methods and Applications: Festschrift in Honor of Peter Schmidt, 281–314. New York: Springer. Search in Google Scholar

Stevenson, B., and J. Wolfers. 2008. “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox.” Brookings Papers on Economic Activity 2008: 1–87. Search in Google Scholar

Tversky, A., and D. Kahneman. 1991. “Loss Aversion in Riskless Choice: A Reference Dependent Model.” Quarterly Journal of Economics 106: 1039–61, Search in Google Scholar

Vendrik, M. C. 2013. “Adaptation, Anticipation and Social Interaction in Happiness: An Integrated Error-Correction Approach.” Journal of Public Economics 105: 131–49, Search in Google Scholar

Wolfers, J. 2003. “Is Business Cycle Volatility Costly? Evidence from Surveys of Subjective Well-Being.” International Finance 6: 1–26, Search in Google Scholar

Wunder, C. 2012. “Does Subjective Well-Being Dynamically Adjust to Circumstances?” Economics Letters 117: 750–2, Search in Google Scholar

Supplementary Material

The online version of this article offers supplementary material (

Received: 2020-06-29
Accepted: 2021-02-25
Published Online: 2021-03-22

© 2021 Walter de Gruyter GmbH, Berlin/Boston