Money IllusionView Financial Glossary Index
The tendency to think in nominal dollars instead of real, or inflation-adjusted dollars. One of a group of Behavioral Financial Biases that can cloud investors’ judgment. The Money Illusion takes inflation out of an investor’s casual thoughts about savings and investments, perhaps leading to underestimation of the need to save. Even relatively tiny inflation rates, with compounding over years, lead to a sharp reduction in purchasing power.