Money illusion, financial literacy and implications of self-perceptions

ABSTRACT

Understanding inflation is crucial in financial decision-making, however, lack of comprehension pertains to money illusion. Using a survey applied to university students, we study the determinants of money illusion including financial literacy and education. Moreover, we test the implications of individuals’ self-perception of interest and knowledge in financial matters. Our findings show that a higher level of financial knowledge results in lower money illusion levels and education improves financial knowledge. Moreover, there exist self-perception biases; self-perceived levels might not always be in line with the actual ones, and there is a gender effect on self-perceptions.

KEYWORDS:

• Money illusion
• financial literacy
• education
• self-perception
• overconfidence

JEL CLASSIFICATION:

• A20
• G40
• G53

Acknowledgement

We would like to thank Vedat Akgiray, Ulaş Akküçük, Belgin Arısan, Mehmet Nafi Artemel, Ali Coşkun, Metin Ercan, Hayat Kabasakal, Hüseyin Sami Karaca, Özlem Hesapçı Karaca and Serhat Çevikel for their help in making this work possible.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Studies like Mjelde et al. (2016) argue if the goal is general behavioural inferences, the results provide support for the use of student samples.