The money illusion is the tendency to reason about the value of money in nominal terms rather than adjusting for inflation, so that a change in monetary value is perceived as a change in real value even when purchasing power has stayed the same or moved in the opposite direction. The economist Irving Fisher discussed the phenomenon in his 1928 book The Money Illusion, and it was later given a rigorous behavioral treatment by economists including Eldar Shafir, Peter Diamond and Amos Tversky in a 1997 paper, which found that judgments of fairness and value in wage and price decisions were strongly influenced by nominal dollar amounts even when real purchasing power was held constant. The concept plays a significant role in behavioral economics explanations of why nominal wage cuts are strongly resisted by workers even during periods of inflation that produce an equivalent real pay cut through rising prices alone.
Facts
Core ClaimMoney illusion is a cognitive bias in which money is thought of in nominal rather than real terms, so nominal changes are mistaken for changes in real purchasing power. 1 First Described Year Classification
Type of Phenomenon Connections
In Branch
Source Wikipedia: Money Illusion
Sources
1. Wikipedia: Money Illusion
WikipediaLead paragraph
In economics, money illusion, or price illusion, is a cognitive bias where money is thought of in nominal, rather than real terms.
Lead paragraph, third sentence
Irving Fisher wrote an important book on the subject, The Money Illusion, in 1928.
lead section, phenomenon-kind classification
In economics, money illusion, or price illusion, is a cognitive bias where money is thought of in nominal, rather than real terms.
In Branch: Cognitive Psychology, Categories
Wikipedia article 'Money illusion' is filed under Category:Cognitive biases.
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