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Money Illusion: Reconsidered in the Light of Cognitive Science

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  • János Vincze

    (Corvinus University, Budapest
    Center for Economic and Regional Studies of the Hungarian Academy of Sciences, Institute of Economics, Budapest)

Abstract

A basic principle of economics is that people always prefer a larger set of opportunities. Money illusion can be considered as the phenomenon when people may not correctly perceive their budget constraints, and may act in ways that run counter to this preference. In this interpretation, money illusion is a cognitive bias, worthwhile to overcome. Herein I argue that taking a view of human decision-making based on certain strands of cognitive psychology, one can reinterpret the evidence for money illusion in two ways. First, I claim that money illusion is inescapable to some extent, and saying that we suffer from it is similar to alleging that we experience optical illusions, only because we are unable to see, say, individual atoms. Second, taking a view on “preferences” different from the traditional one, I contend that it may bring little benefit to get rid of money illusion even in the cases where it is possible to do so. To follow up the visual analogy, even if we can improve our eyesight it is not obviously desirable. These arguments seem to lead to a Candidean disposition: there is no possible improvement on the state of affairs as far as “money illusion” is concerned. Nonetheless, I will make some positive proposals concerning economic policy and economics research.

Suggested Citation

  • János Vincze, 2019. "Money Illusion: Reconsidered in the Light of Cognitive Science," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 69(2), pages 191-215, June.
  • Handle: RePEc:aka:aoecon:v:69:y:2019:i:2:p:191-215
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    2. Lorenzo Esposito & Lorenzo Marrese, 2021. "The impact of cognitive skills on investment decisions. An empirical assessment and policy suggestions," DISCE - Working Papers del Dipartimento di Politica Economica dipe0019, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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    More about this item

    Keywords

    money illusion; ecological rationality; knowledge representation;
    All these keywords.

    JEL classification:

    • B10 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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