Perception of Value of Money in Unfamiliar Currencies

Abstract

The real value of money as well as the perceived value of money is subject to changes. Inflation and deflation are examples of changes in real value. It has been shown that these changes do not always correspond to changes in subjective value. The money illusion implies that the subjective value of money is biased by the nominal representation in times of inflation or deflation. This thesis examines the related euro illusion referring to an influence of the nominal representation on the subjective value of money when a small-unit currency (high nominal value) is compared to a large-unit currency (low nominal value) or the reverse. In addition the thesis investigates whether accuracy-effort tradeoffs affect the size of the euro illusion. In Study I participants were in four experiments requested to evaluate prices of consumer products in their domestic currencies (Swedish crowns or pound sterling) or in euros, or to make evaluations of prices of low-price and high-price essential and non-essential consumer products in fictitious currencies with different exchange rates. Either a positive or a negative attitude was induced. In three experiments Study II tested the effects of mood on choices between two fictitious currencies for making payment or obtaining a salary as well as on choices between low-price and high-price consumer products with prices expressed in fictitious currencies. Mood was induced in one experiment and in two experiments natural mood was assessed. Three experiments in Study III investigated the role of income on the euro illusion. A reverse euro illusion was hypothesized because when the income is known, the prices of consumer products would be compared to the income, and thus they would be evaluated as less expensive in a currency with a large nominal value than in a currency with a small nominal value (called the compression effect). In Study IV three experiments systematically varied either the actual or subjective value for the same nominal value of money. The results of the conducted studies demonstrated the expected bias toward the nominal representation of prices (the euro illusion) when prices were expressed in fictitious currencies. This was done for both evaluations of prices of consumer goods, of choices of currency, and of choices between consumer products. Furthermore, both changes and no changes in the nominal representation affected price evaluations. In support of the role of accuracy-effort tradeoffs, the euro illusion was reduced by a more important task (evaluation of prices of high-price essential products), a negative attitude, and an induced activated negative mood, as well as a simple exchange rate.