DP11643 Money Illusion and Household Finance

Author(s): Thomas A. Stephens, Jean-Robert Tyran
Publication Date: November 2016
Keyword(s): household finance, loss aversion, Money illusion
JEL(s): C91, D03, D14, E21, G11
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11643

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.