Direction of change: Loss aversion

Evidence also suggests that particular attention should be paid to the direction of change in the variable being valued. In stated preference methods, respondents often exhibit loss aversion - where the negative psychological impact of a loss is expected to be greater than the corresponding positive impact of a gain in the same good (Sugden, 2005; Guria et al., 2005). Valuations based on subjective well-being data can offer critical insights into whether loss aversion reflects a true imbalance in the well-being derived from losses versus gains, or whether it is a result of some of the biases in decision-making noted earlier (Box 4.6). For the time being, it may be helpful to estimate valuations for losses and gains separately where possible, because the well-being impact of, for example, withdrawing a particular policy initiative may not be equivalent to the initial well-being impact of introducing it in the first place.

Using subjective well-being to adjust preference data

Where stated and revealed preference data are used in CBA, Layard, Mayraz and Nickell (2008) and Powdthavee (2010) propose that subjective well-being data can be used to resolve the problem of how to value costs and benefits accruing to people with different incomes. Direct use of prices in CBA assumes that $1 is equally valuable to all parties concerned. However, valuation surveys tend to produce very different valuation estimates for people at different points on the income distribution - because those with higher incomes are typically willing to pay more for the non-market factor in question. This can distort results because it weighs the views of higher-income individuals more heavily than the views of lower-income individuals. Layard et al. (2008) suggest using subjective well-being data (evaluative happiness, life satisfaction, or a combination of the two) to estimate the marginal utility of income. Whilst this assumes the position that subjective well-being can be used as a measure of utility, a position on which not everyone agrees, it nonetheless provides a way of managing the impact of the marginal utility of income in an evidence-based manner.

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