Money Illusion and Household Finance

38 Pages Posted: 4 Dec 2016

See all articles by Thomas Alexander Stephens

Thomas Alexander Stephens

WU Vienna University of Economics and Business; University of Vienna

Jean-Robert Tyran

University of Vienna; University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2016

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

JEL Classification: C91, D03, D14, E21, G11

Suggested Citation

Stephens, Thomas Alexander and Tyran, Jean-Robert, Money Illusion and Household Finance (November 13, 2016). Available at SSRN: https://ssrn.com/abstract=2878772 or http://dx.doi.org/10.2139/ssrn.2878772

Thomas Alexander Stephens

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
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Austria
+43-1-31336-5833 (Phone)
+43-1-31336-9203 (Fax)

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Jean-Robert Tyran (Contact Author)

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

HOME PAGE: http://homepage.univie.ac.at/jean-robert.tyran/

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 353 23 027 (Phone)

HOME PAGE: http://www.econ.ku.dk/tyran/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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