Choices, Values, and Frames

ABSTRACT. The term money illusion refers to a tendency to think in terms of nominal rather than real monetary values. Money illusion has significant implications for economic theory, yet it implies a lack of rationality that is alien to economists. This paper reviews survey questions, which are designed to shed light on the psychology that underlies money illusion, regarding people's reactions to variations in inflation and prices. We propose that people often think about economic transactions in both nominal and real terms and that money illusion arises from an interaction between these representations, which results in a bias towards a nominal evaluation.

“A nickel ain't worth a dime anymore.”

We have standardized every other unit in commerce except the most important and universal unit of all, the unit of purchasing power. What business man would consent for a moment to make a contract in terms of yards of cloth or tons of coal, and leave the size of the yard or the ton to chance? … We have standardized even our new units of electricity, the ohm, the kilowatt, the ampere, and the volt. But the dollar is still left to the chances of gold mining.