Money illusion

Prices and salaries are expressed in monetary units. According to economic theory, people should rationally focus on real purchasing power rather than nominal figures. However, consumers and employees react strongly to nominal changes even when real purchasing power remains constant. The key questions are: Why do nominal values dominate perception despite unchanged purchasing power? Which situations amplify this illusion? And what does the evidence tell us?

Studies

The Salary Reduction Scenario

Eldar Shafir, Peter Diamond, and Amos Tversky conducted a series of experiments on money illusion at Princeton University in 1997. In one scenario, 267 participants were asked to evaluate two situations: Person A receives a 2% salary increase with 4% inflation (resulting in a 2% loss in purchasing power). Person B receives a 2% salary cut with 0% inflation (also resulting in a 2% loss in purchasing power). Although both outcomes are identical in real terms, 71% of participants rated Person A as better off. In a second scenario, the researchers asked about satisfaction and likelihood of resignation: 62% said Person A would be more satisfied and significantly less likely to resign—despite having identical purchasing power. The remarkable finding: Even when explicitly informed about real purchasing power, the effect persisted in 56% of cases.

The Experimental Market Game

Ernst Fehr and Jean-Robert Tyran conducted an economic experiment in 2001 with 96 participants at the University of Zurich. They created artificial markets in which participants acted as sellers setting prices. In the first phase, an equilibrium price was established. The researchers then reduced the nominal money supply in the system by 20%—economically, all prices should have immediately fallen by 20%. Instead, prices took an average of 8 rounds to adjust. The sellers clung to the old nominal price levels. Even more revealing: when only some participants were subject to money illusion (in one variant, the researchers explained the real situation to some participants), prices remained rigid even longer—because the "rational" participants anticipated that others would act irrationally. The effect was self-reinforcing.

Principle

Which principle for Customer Experience Design can be derived from this? The principle of nominal value emphasis states that customers evaluate prices, savings, and value propositions primarily based on visible numbers rather than their actual purchasing power or relative significance. In customer experience, value changes should therefore be communicated so that nominal amounts create a psychologically favorable effect—even when the real benefit remains identical. This principle works particularly well in pricing, discounts, and loyalty programs, but loses effectiveness when customers are actively encouraged to compare against reference values or when inflation is highly salient. The following guidelines demonstrate how to implement this principle in practice.

Guidelines

Keep price increases nominally small

For unavoidable price increases, communicate the nominal increase in the smallest possible terms, even when the percentage increase remains the same. Instead of saying "10% more," say "50 cents more per day." The absolute nominal figure influences perception more powerfully than percentages or real purchasing power comparisons. Use the smallest meaningful time unit for presentation.

Emphasize value increases nominally

When highlighting performance improvements or added value, emphasize the absolute value increase rather than the percentage. Stating '€300 more value' has a stronger impact than '15% more performance'. The absolute figure creates a concrete reference point in the customer's mental accounting. Use the largest meaningful nominal representation—annual values instead of monthly values, whenever possible.

Show loyalty benefits as absolute savings

Always communicate loyalty benefits, discounts, and savings as absolute dollar amounts rather than percentages. "You saved €487 this year" creates a stronger impact than "12% average discount." The concrete number is mentally registered as tangible value and generates a feeling of real gain, even when purchasing power has been eroded by other factors.

Emphasize nominal price stability for renewals

# CX Guideline: Emphasize Nominal Price Stability in Renewals For contract renewals or subscriptions, emphasize nominal price stability ("Your price remains unchanged at €29.90"), even when real purchasing power declines due to inflation. This nominal constancy is perceived as fair and increases renewal rates. Avoid phrases like "inflation-adjusted" or "in real terms," which shift focus to declining purchasing power.