This is known as the money illusion, since people appear more likely to think about money in nominal rather than real values. In other words, we forget that money is subject to inflation, and that a dollar can mean different things at different times. (As Yogi Berra once said, “A nickel ain’t worth a dime anymore.”)

What I find most interesting about the money illusion is that ****even when people realized that Ann was actually making more money – they saw through the money illusion – they still believed that Barbara was happier.**** Why? Because our emotions don’t know about inflation – they just want the raise.

What does this have to do with the money illusion? By looking at these biases from the perspective of the brain, we can see that they involve the same basic mistake. In both instances, people are forgetting that the mere amount of money involved doesn’t actually mean anything. A more expensive Cabernet doesn’t always taste better and a bigger salary doesn’t always mean more money, at least in “real” terms.

So why do we fall victim to his illusion, even when we know about inflation and potentially overpriced wines? ****Because it’s very, very hard to figure out how we should feel**** – Is this Cabernet delicious? Should I be making more money? – and so we end up using untrustworthy shortcuts. …

My **** highlights.

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