Money Illusion and Household Finance

Jean-Robert Tyran and Thomas Thomas

No 11643, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Money illusion; Loss aversion; Household finance (search for similar items in EconPapers)
JEL-codes: C91 D03 D14 E21 G11 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-mac and nep-pay
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Citations: View citations in EconPapers (3)

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