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
Date Written: October 15, 2017
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: Suggested Citation