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Behavioral Finance

Money Illusion

Also called: nominal illusion, inflation illusion

Money illusion is thinking in nominal rather than real terms — feeling richer after a 3% raise in a 5% inflation year. It's why wage cuts through inflation are politically tolerable when explicit cuts are not, and why savers accept deposit rates below inflation. Every long-horizon financial decision should be made in real terms, which is a discipline almost nobody applies by default.

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