Why do high ability people also suffer from money illusion? Experimental evidence of behavioral contradiction

Abstract

Money illusion refers to the tendency of the individuals’ decisions to be influenced by the nominal amount of money. It is a persistent phenomenon even for high ability people such as professional investors, and causes considerable aggregate nominal inertia. However, it has not been well discussed why they suffer from money illusion even though they are able to distinguish the nominal and real value. In this paper, we focus on numerical ability and investigate its relation to the tendency to suffer from money illusion. We show subjects two alternative funds (one fund has a higher nominal value and the other fund has a higher real value) and asked which one is preferable. Subsequently, they evaluated the attractiveness of each fund with a scale from 0 to 10. Results show that high numeracy generally helps to distinguish the nominal and real value. However, when high numeracy individuals consider well-being, their decision is strongly affected by nominal value. Additionally, even though the high numeracy subjects were able to distinguish the nominal and real value, they evaluate the attractiveness of the fund with the high real value significantly lower than the fund with the high nominal value. Those behavioral tendencies prominently appeared when the nominal values are shown by the balance of assets. The contradictory behaviors of high numeracy individuals may be largely involved in the integral emotions which accompanying with the nominal value.

Keywords

• Money illusion
• Numeracy
• Decision-making
• Emotional bias