Money Illusion
We think of money in nominal terms rather than real purchasing-power terms.
Money illusion is the tendency to think of currency in nominal, rather than real, terms. People focus on the face value of money rather than its inflation-adjusted purchasing power. Workers are more upset by a 2% nominal pay cut than by a 3% pay cut during 4% inflation, even though the latter means a greater real reduction in purchasing power.
What it looks like in the wild.
- Everyday life Pay Raise Satisfaction An employee celebrates a 5% pay raise not realizing that 7% inflation means their real purchasing power actually fell by 2%.
Recognising a definition is not the same skill as spotting it.
Two scenarios from the app, with distractors drawn from the same family of biases — which is what makes them hard.
Dana was pleased that her savings account earned $100 in interest. She didn't consider that inflation had eaten up more than that amount over the year.
Sam was happy his paycheck was the same as last year. He didn't realize that the cost of groceries and gas had gone up, so his real income was lower.
Biases rarely arrive alone.
Understand more. Assume less.
188 biases, 18,869 scenarios, and a record of how you actually decide.
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