Money Illusion and Household Finance

Thomas Alexander Stephens, Jean-Robert Tyran

We elicit money illusion and match it with financial and sociodemographic data from official registers on a quasi-representative sample of the Danish population. We find that people who are more prone to money illusion hold more of their gross wealth in nominal assets, including bank deposits and bonds, and less in real assets, including real estate and stocks. This bias is robust to controls for education, income, cognitive ability and other relevant characteristics. We further find that money illusion is a costly bias: 10-year portfolio returns are about 10 percentage points lower for individuals with high money illusion.

Department of Economics, Vienna Center for Experimental Economics
External organisation(s)
Wirtschaftsuniversität Wien (WU)
No. of pages
Publication date
Austrian Fields of Science 2012
502045 Behavioural economics
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