Tendency for people to think of money in nominal, rather than real, terms.
Shafir, E., Diamond, P., and Tversky, A. (1997). Money illusion. The Quarterly Journal of Economics, 112(2), 341-374.
The item was taken from Shafir et al. (1997):
Suppose Adam, Ben, and Carl each received an inheritance of $200,000, and each used it immediately to purchase a house. Suppose that each of them sold the house a year after buying it. Economic conditions, however, were different in each case:
When Adam owned the house, there was a 25% deflation—the prices of all goods and services decreased by approximately 25%. A year after Adam bought the house, he sold it for $154,000 (23% less than he paid).
When Ben owned the house, there was no inflation or deflation—prices had not changed significantly during that year. He sold the house for $198,000 (1% less than he paid for it).
When Carl owned the house, there was a 25% inflation—all prices increased by approximately 25%. A year after he bought the house, Carl sold it for $246,000 (23% more than he paid).
Please rank Adam, Ben, and Carl in terms of the success of their house-transactions. Assign 1 to the person who made the best deal, and 3 to the person who made the worst deal.
Participants who chose Carl as the person who made the best deal (the only one to make a nominal gain but a real loss) are coded as biased.
Tommasi, F, Ceschi, A, Weller, J. et al. (2021) An empirical evaluation of tech interventions to improve financial decision-making. European Journal of Training and Development, 45(6/7), 633-649.