Money Illusion for Others: Consumers Are More Affected by Money Illusion than They Think Others Are

During inflationary periods, consumers tend to focus on nominal price changes when making consumption decisions, often overlooking the changes in their real purchasing power, a phenomenon known as money illusion. What do consumers think when comparing how they and other consumers make decisions under inflation? Consumers might believe they make economically better decisions than others. However, consumers fail to realize that their choices are more distorted by money illusion than they expect others’ decisions to be. This research uncovers a consequential disconnect: the imprint of money illusion on consumers’ decisions persists despite consumers asserting to prioritize real over nominal value, more so than they believe others do. In nine studies (N = 3075), the self-other difference in the money illusion effect is examined across different decision contexts (buying, selling, salary evaluation). Results show that these self-other differences are more nuanced, varying based on (i) the type of economic decision (pronounced in buying decisions and attenuated in selling decisions) and (ii) the temporal reference point (evident when considering the inflation effect retrospectively and attenuated when considering it prospectively). This research extends the social comparison literature into the domain of inflation, with findings that inform price-setting decisions and perceptions of job appeal.