Do you have money illusion?

Seema Singh — Tue, 24 Mar 2009 10:50:00 GMT

In these uncertain times when wealth seems to have been eroded from the markets, (and investment banks), if people have illusions about money, it shouldn't sound unusual. After all, even behavioural economists have proposed something called ‘money illusion', though it is nothing but a deviation from the rational evaluation of money. And rationality values money by the bundle of goods that it can buy.

So what causes this deviation and makes people behave in myriad ways when it comes to money? It is emerging that there's a center in the brain for "money illusion" which when activated makes people value money more than it deserves to be.

In March 23 issue of the Proceedings of the National Academy of Sciences, US, scientists report this finding. "The illusion, which posits that people tend to value an increase in income regardless of their ability to buy more, may help explain some people's irrational behaviors around money and wealth," say Bernd Weber, Antonio Rangel, Matthias Wibral, and Armin Falk

They used functional magnetic resonance imaging (fMRI) on test ‘subjects', who earned either a high or low "income" during the study and were than allowed to choose items from a high- or low-priced catalogue.

The researchers found that subjects with the high income/high-priced catalogue showed significantly higher activation of the brain's reward centre than the low income/low-priced catalogue subjects. This increased activation, they say, indicates that the subjects were responding to the money illusion, since everyone's relative purchasing power was the same.

If this finding has piqued your curiosity and you want to move from ‘brain' to ‘mind', here's an interesting feature on why ‘money messes with your mind'. Though be warned that scientists are still far away from deciphering why some people go crazy over it, some remain rational and some, sage-like, pay no heed to it!

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Lab Rats : Economists

Do you have money illusion?