Beware of the 'money illusion'

26 March 2009
Research from the University of Bonn, published this week, has found evidence humans are naturally inclined to think a salary increase is a good thing, even if it is negated by rising inflation. Volunteers were asked by the research team to solve simple puzzles, for which they would “earn” money, while their brains were monitored. The guinea pigs were then able to use this money to choose goods from a catalogue. In a second test with the same group, the wages were 50 per cent higher but so were the prices of goods in the catalogue, so essentially “purchasing power” was identical. However, the researchers found activity in the ventro-medial prefrontal cortex – the part of the brain associated with pleasure – was far higher during the high-wage scenario. This is called the “money illusion”. The study does have a serious point. The research proves the brain only considers money as “nominal”, not “real”, and people “like to be seduced by large numbers”. As professor and economist Armin Falk, who conducted the research, says: “Even minor departures from rational behaviour, a little ‘money illusion’ can have major economic consequences”.
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