Money illusion is a behavioral bias in which a person thinks in terms of nominal rather than real values. This paper reports homeowners’ responses to a survey designed to measure the extent of money illusion as well as homeowners’ expectations regarding home valuations. Our survey respondents suffer from money illusion, yet they have reasonable expectations of home prices. Our analysis did not identify any unique individual characteristic that correlates with homeowners’ choices and suggests that the relationship between money illusion and mispricing is subtle and multi-faceted.
Ackert, Lucy F., Church, Bryan K. and Jayaraman, Narayanan, Is There a Link Between Money Illusion and Homeowners’ Expectations of Housing Prices?, August 30, 2010.