PhenomenonValuation & choice · Cognitive Bias · Entry 104
Money Illusion – when a bigger number feels like more money
Do you feel richer when your salary increases, even if prices rise even faster? That’s Money Illusion – the tendency to focus on the nominal value of money rather than its actual purchasing power.
Where it can show up
- Salaries & inflation – people celebrate pay raises without realizing inflation eats up the gains.
- Currency exchange – 1000 local units seem like more than 100 dollars, even if their value is the same.
- Investments – nominal capital growth can be misleading if inflation isn’t considered.
A practical countermeasure
- Focus on real purchasing power – what matters is what your money can actually buy.
- Track inflation – a higher income doesn’t always mean a higher standard of living.
- Don’t be fooled by big numbers – understand what your money is truly worth in the long run.