Authors : ASM Rejaul Hassan Karim Bakshi
Abstract: Economists have no hesitation in assuming that economic agents are rational. The general intuition is that economic decision affects real outcome that directly determines agent’s well being in question. One such aspect of rationality we often ascribe is that agents are free from money illusion indicating that agents are categorically caring about real magnitudes and not the nominal one. It is also argued that the problem of money illusion could be mitigated through learning and coordination among people. Money, thereby, theoretically, has no real effect in the long run. In this study, we attempt to investigate individual rationality in a sense whether, agents make decisions that are free from money illusion, particularly when subjects possess a sufficient economics background. We use empirical data with subjects all studying M.Sc in Economics at the University of Copenhagen. The experimental results show that even with such strong economics training subjects are individually prone to money illusion and even, at the aggregate level, locked in the Pareto inefficient outcome. Individual learning over time or coordination among people within the group could not lead them to correctly identify and obtain the rational decision at all.
ASM Rejaul Hassan Karim Bakshi , 2009. Does Economics Training Really Matter to Mitigate Money Illusion? Evidence from Experimental Study. The Social Sciences, 4: 673-679.