Description

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.

Items (1)

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.

Scoring

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.

Sources

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.