Abstract
We report two experiments to demonstrate the money illusion in intuitive financial judgments. In Experiment 1 we assess the extent to which the nominal representation affects participants’ expectations of changes in share prices following negative or positive financial information. In support of an anticipated bias towards the nominal representation, a lower share price was found to lead to higher expected percentage changes. Experiment 2 investigates equivalent effects for share prices represented in euros or Swedish crowns (approximately equal to 0.1 euro). Here shares represented in the more expensive euro resulted in higher expected percentage changes in share prices, hence replicating the results of Experiment 1. A third experiment was also conducted where we demonstrate how changes of nominal prices affect participants’ trading following a split or a reverse split of share prices. The results show that both buyers and sellers were more willing to trade shares after a split, whereas the opposite was true after a reversed split.
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