Financial Security

The Illusion Of Money

Most people will assume that they are familiar with the prices of goods and services and can therefore form an informed opinion about the value of their salary, savings and investments. However, an important economic theory holds that this is not the case. People tend to confuse the nominal value of money with its real value.

Therefore, it can be believed that the one euro in the wallet is worth more and is sufficient for more goods and services than is actually the case. This phenomenon is also known as the illusion of monetary value.

The Illusion of Money

Impact in the real world

Economists Eldar Shafir, Peter A. There is a tendency to believe that inflation will only prevail for a short time and that prices will return to the previous level, even if there is really no evidence to support this. The scientists also found that contracts and their terms were not as often linked to inflation as they should have been. For example, the price for a glass of Coca-Cola from around 200 ml was set at 5 cents and fluctuated only slightly and locally between 1886 and 1959. In theory, an inflation-related increase should be included in every payment plan.

With nearly all central banks in industrialized countries targeting inflation of up to 2% per year, it is surprising that salary levels or long-term projects do not automatically take this into account. This could mean that workers don’t ask for a raise to offset inflation, or at least don’t ask for more salary enough to keep up with inflation.

When dealing with money, you not only have to pay attention to the nominal value but also what you actually get for it. That means ensuring that its value is not diminished by inflation and that it is increasing both real and nominal.