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Perceiving the Real Value: How Inflation Communication Affects the Attractiveness of Long-Term Investments

38 Pages Posted: 13 Nov 2017 Last revised: 16 Nov 2017

Henning Cordes

University of Muenster - Finance Center Muenster

Thomas Langer

University of Muenster - Finance Center

Date Written: October 15, 2017

Abstract

Ignoring the effects of inflation in retirement planning can have severe consequences for the future financial wellbeing. It thus seems important to make investors explicitly aware of the discrepancy between nominal wealth and real purchasing power. The relevance of inflation can be communicated in various ways, from simply mentioning the expected annual inflation rate to directly presenting long-term payoff distributions in real next to nominal terms. In an experimental study, we explore how different forms of inflation communication affect the attractiveness of investing and thus the propensity to delay consumption. Using a novel experimental approach that mimics the distinction between nominal wealth and real purchasing power by a declining conversion rate mechanism, we find systematic behavioral patterns that are subtler than the naïve intuition suggests.

Keywords: financial decision making, money illusion, inflation, savings behavior

JEL Classification: C91, D14, D83, D91

Suggested Citation

Cordes, Henning and Langer, Thomas, Perceiving the Real Value: How Inflation Communication Affects the Attractiveness of Long-Term Investments (October 15, 2017). Available at SSRN: https://ssrn.com/abstract=3068755

Henning Cordes (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

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