Watch for
Focusing on the face value of money rather than its purchasing power.
Decision & ChoiceBias #89
Money Illusion
We think in nominal not real terms.
The tendency to think of currency in nominal monetary values rather than real terms adjusted for inflation leading to misjudgement of true value.
Why it matters: Explains why people oppose nominal wage cuts even when real wages have already fallen.
Try this
Always convert nominal amounts to real purchasing power before evaluating.
Real-world example
Feeling happy about a 2% salary raise without noticing that 3% inflation means you actually earn less.
Key researchers
Irving Fisher, Eldar Shafir
First described in 1997
Psychological mechanism
Nominal anchoring. The face value of currency is the most salient and easily processed metric. Adjusting for inflation requires effortful calculation that the brain often skips.
Seminal research
Eldar Shafir, Peter Diamond, and Amos Tversky (1997), "Money illusion."
Related Biases
Debrief
Biases are not character flaws. They are recurring patterns in how minds compress uncertainty, save energy, and narrate reality. Once you recognise the pattern, you can slow the decision down, test the assumption, and make space for a better explanation.
Sources
Original ResearchShafir Diamond and Tversky (1997) — Money illusion
EncyclopediaWikipedia overview