IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v145y2018icp465-473.html
   My bibliography  Save this article

Does money illusion matter in intertemporal decision making?

Author

Listed:
  • Yamamori, Tetsuo
  • Iwata, Kazuyuki
  • Ogawa, Akira

Abstract

To examine the degree to which price fluctuations affect how individuals approach an intertemporal decision-making problem, we conduct a laboratory experiment in which subjects spend their savings to purchase only one commodity over 20 periods. In the control treatment, the commodity price is constant across all periods. In the small (large) price-fluctuation treatment, the price rate of change is always 1% (20%). Regardless of the treatment, the commodity price and subjects’ savings change at the same rate over time. Therefore, the optimal amount of consumption is the same in all three treatments. Our main findings are twofold. First, the magnitude of misconsumption (i.e., the deviation from optimal consumption) is significantly high, with the large price-fluctuation treatment being the highest, followed by the small price-fluctuation treatment and then the control treatment. Second, regardless of the presence of price fluctuations, subjects exhibit underconsumption (oversaving) behavior, and price fluctuations strengthen this tendency.

Suggested Citation

  • Yamamori, Tetsuo & Iwata, Kazuyuki & Ogawa, Akira, 2018. "Does money illusion matter in intertemporal decision making?," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 465-473.
    • Handle: RePEc:eee:jeborg:v:145:y:2018:i:c:p:465-473
    DOI: 10.1016/j.jebo.2017.11.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268117303232
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2017.11.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fehr, Ernst & Tyran, Jean-Robert, 2007. "Money illusion and coordination failure," Games and Economic Behavior, Elsevier, vol. 58(2), pages 246-268, February.
    2. Richard H. Thaler & Amos Tversky & Daniel Kahneman & Alan Schwartz, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 647-661.
    3. Enrica Carbone & John Hey, 2001. "A Test of the Principle of Optimality," Theory and Decision, Springer, vol. 50(3), pages 263-281, May.
    4. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    5. John D. Hey & Julia A. Knoll, 2018. "Strategies in dynamic decision making – An experimental investigation of the rationality of decision behaviour," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 9, pages 223-233, World Scientific Publishing Co. Pte. Ltd..
    6. Houser, Daniel & Winter, Joachim, 2004. "How Do Behavioral Assumptions Affect Structural Inference? Evidence from a Laboratory Experiment," Journal of Business & Economic Statistics, American Statistical Association, vol. 22(1), pages 64-79, January.
    7. Stephen Johnson & Laurence J. Kotlikoff & William Samuelson, 1987. "Can People Compute? An Experimental Test of the Life Cycle Consumption Model," NBER Working Papers 2183, National Bureau of Economic Research, Inc.
    8. Vital Anderhub & Werner Güth & Wieland Müller & Martin Strobel, 2000. "An Experimental Analysis of Intertemporal Allocation Behavior," Experimental Economics, Springer;Economic Science Association, vol. 3(2), pages 137-152, October.
    9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    10. Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
    11. Charles N. Noussair & Gregers Richter & Jean-Robert Tyran, 2008. "Money Illusion and Nominal Inertia in Experimental Asset Markets," Discussion Papers 08-29, University of Copenhagen. Department of Economics.
    12. Matthew E. Kahn, 2005. "The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 271-284, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Darriet, Elisa & Guille, Marianne & Vergnaud, Jean-Christophe & Shimizu, Mariko, 2020. "Money illusion, financial literacy and numeracy: Experimental evidence," Journal of Economic Psychology, Elsevier, vol. 76(C).
    2. Blaufus, Kay & Milde, Michael & Schaefer, Marcel, 2022. "Saving at tax time: Do additional retroactive savings opportunities increase retirement savings?," arqus Discussion Papers in Quantitative Tax Research 272, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Rui Zhou, 2022. "Sustainable Economic Development, Digital Payment, and Consumer Demand: Evidence from China," IJERPH, MDPI, vol. 19(14), pages 1-20, July.
    4. Tetsuo Yamamori & Kazuyuki Iwata & Akira Ogawa, 2020. "Effect of Longevity on Saving Behavior: An Experimental Study on the Simple Intertemporal Life-Cycle Problem," Working Papers e153, Tokyo Center for Economic Research.
    5. Bachmann, Kremena & Lot, Andre & Xu, Xiaogeng & Hens, Thorsten, 2023. "Experimental Research on Retirement Decision-Making: Evidence from Replications," Journal of Banking & Finance, Elsevier, vol. 152(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tetsuo Yamamori & Kazuyuki Iwata & Akira Ogawa, 2014. "An Experimental Study of Money Illusion in Intertemporal Decision Making," Working Papers e085, Tokyo Center for Economic Research.
    2. Tyran, Jean-Robert & Stephens, Thomas A, 2012. "?At least I didn?t lose money? Nominal Loss Aversion Shapes Evaluations of Housing Transactions," CEPR Discussion Papers 9198, C.E.P.R. Discussion Papers.
    3. Muller, Wieland, 2001. "Strategies, heuristics, and the relevance of risk-aversion in a dynamic decision problem," Journal of Economic Psychology, Elsevier, vol. 22(4), pages 493-522, August.
    4. Götte, Lorenz & Huffman, David B., 2005. "Do Emotions Improve Labor Market Outcomes?," IZA Discussion Papers 1895, Institute of Labor Economics (IZA).
    5. Yasufumi Gemma, 2016. "Money Illusion Matters for Consumption-Saving Decision-Making: An Experimental Investigation," IMES Discussion Paper Series 16-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    6. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    7. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    8. Grundmann, Susanna & Giamattei, Marcus & Lambsdorff, Johann Graf, 2019. "Intentions rather than money illusion – Why nominal changes induce real effects," European Economic Review, Elsevier, vol. 119(C), pages 166-178.
    9. Luigi Guiso, 2015. "A Test of Narrow Framing and its Origin," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(1), pages 61-100, March.
    10. Fabrizio Adriani & Giancarlo Marini & Pasquale Scaramozzino, 2009. "The Inflationary Consequences of a Currency Changeover on the Catering Sector: Evidence from the Michelin Red Guide," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 111-133, February.
    11. Jonas Agell & Helge Bennmarker, 2003. "Endogenous Wage Rigidity," CESifo Working Paper Series 1081, CESifo.
    12. Fehr, Ernst & Goette, Lorenz, 2005. "Robustness and real consequences of nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 779-804, May.
    13. Louis Lévy-Garboua & Claude Montmarquette, 1996. "Cognition In Seemingly Riskless Choices And Judgments," Rationality and Society, , vol. 8(2), pages 167-185, May.
    14. Thieme, Lutz & Winkelhake, Olaf & Hartmann, Ulrich, 2014. "Fairness als universelle Norm? Empirische Evidenz ohne Manna [Fairness as a universal norm? Empiric evidence without manna]," Working Papers of the European Institute for Socioeconomics 12, European Institute for Socioeconomics (EIS), Saarbrücken.
    15. Cubitt, Robin P. & Drouvelis, Michalis & Gächter, Simon & Kabalin, Ruslan, 2011. "Moral judgments in social dilemmas: How bad is free riding?," Journal of Public Economics, Elsevier, vol. 95(3), pages 253-264.
    16. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE, revised 2017.
    17. Suleyman Basak & Hongjun Yan, 2010. "Equilibrium Asset Prices and Investor Behaviour in the Presence of Money Illusion," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 914-936.
    18. Blumkin, Tomer & Ruffle, Bradley J. & Ganun, Yosef, 2012. "Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods," European Economic Review, Elsevier, vol. 56(6), pages 1200-1219.
    19. Sibly, Hugh, 2007. "Loss aversion, price and quality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(5), pages 771-788, October.
    20. Andrea Fazio & Tommaso Reggiani, 2022. "Minimum wage and tolerance for inequality," MUNI ECON Working Papers 2022-07, Masaryk University, revised Feb 2023.

    More about this item

    Keywords

    Intertemporal decision making; Money illusion; Price fluctuations; Economic experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:145:y:2018:i:c:p:465-473. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.