Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Inflation 'felt' to be not so bad as a wage cut

25.03.2009
Economists and brain researchers in Bonn have discovered a neuronal cause of the so-called 'money illusion'

What would you prefer: a three per cent wage rise at five per cent inflation? Or a two per cent wage-cut with stable prices?

Many people, faced with this choice, would take the first option, although the true purchasing power of their income sinks in both cases by exactly the same amount, namely two per cent. Researchers at Bonn University and thhe California Institute of Technology have now discovered the cerebro-physiological cause underlying this so-called "money illusion". This effect is of great practical relevance in that it explains, for instance, why financial policy and inflation can have a beneficial effect on employment and economic growth.

Many people view a rise in their income as a good thing, even when the increase is completely negated again by inflation. This effect is called the "money illusion", and many economists are of the opinion that it should not exist. After all, the true purchasing power of the income remains exactly the same. So, for a rational market activist it should be of absolutely no concern under these conditions whether his nominal income sinks or rises. However, laboratory experiments and field studies have repeatedly confirmed that this effect does indeed exist.

Professor Dr. Armin Falk and Dr. Bernd Weber of Bonn University have now approached this topic of the money illusion from a completely different angle. Falk is an economist and Weber a brain researcher – an unusual alliance. Both have been trying to discover which neuronal processes underlie economic decisions. For this purpose, they arranged for their test subjects to "play" economic situations while, at the same time, they monitored their brain processes.

Experiments in the Brain Scanner

A total of 24 subjects participated in the study which has just been published. Whilst recumbent in a scanner, they were called upon to solve simple problems. Success brought a financial reward. At the same time, as the experiment evolved, the fluctuations in the blood oxygen saturation of diverse areas of their brains were monitored. This reading indicates the degree of activity in the relevant area of the brain. The prize-money was not subsequently paid out in cash, but the successful test subjects were allowed to choose goods from a catalogue – including CDs, sun cream or computer accessories.

"We had now confronted our test subjects with two different situations", Falk explains. "In the first, they could only earn a relatively small amount of money, but the items in the catalogue were also comparatively cheap. In the second scenario, the wage was 50 per cent higher, but now all the items were 50 per cent more expensive. Thus, in both scenarios the participants could afford exactly the same goods with the money they had earned – the true purchasing power had remained exactly the same." The test subjects were perfectly aware of this, too – not only did they know both catalogues, but they had been explicitly informed at the start that the true value of the money they earned would always remain the same.

Despite this, an astonishing manifestation emerged: "In the low-wage scenario there was one particular area of the brain which was always significantly less active than in the high-wage scenario", declares Bernd Weber, focusing on the main result. "In this case, it was the so-called ventro-medial prefrontal cortex - the area which produces the sense of quasi elation associated with pleasurable experiences". Hence, on the one hand, the study confirmed that this money illusion really exists, and on the other, it revealed the cerebro-physiological processes involved.

An Explanation for the unpopular "Teuro"?

The results achieved by these scientists in Bonn demonstrate that as far as the brain is concerned money is represented as being "nominal", and not only "real". In other words: people like to be seduced by large numbers. This is of great practical relevance as the money illusion explains, for example, why the economy allows itself to be reflated by expansive financial policy. It also offers an explanation for why nominal wages rarely sink, whereas true wages, in contrast, fall in value in periods of inflation. Many economists also see the money illusion as an explanation for speculative bubbles, such as those in the property or shares markets. Armin Falk declares: "Even minor departures from rational behaviour, i.e. a "little money illusion" can have major economic consequences".

Bernd Weber, Antonio Rangel, Matthias Wibral, Armin Falk: The medial prefrontal cortex exhibits money illusion; PNAS 2009

Contact:
Professor Dr. Armin Falk
Institut für Gesellschafts- und Wirtschaftswissenschaften, Universität Bonn
Telephone: 0228/73-9240
E-mail: armin.falk@uni-bonn.de
Privatdozent Dr. Bernd Weber
Life&Brain-Center, Universität Bonn
Telefon: 0228/6885-262
E-Mail: bweber@lifeandbrain.com

Dr. Bernd Weber | EurekAlert!
Further information:
http://www.uni-bonn.de
http://www.lifeandbrain.com

More articles from Studies and Analyses:

nachricht The importance of biodiversity in forests could increase due to climate change
17.11.2017 | Deutsches Zentrum für integrative Biodiversitätsforschung (iDiv) Halle-Jena-Leipzig

nachricht Win-win strategies for climate and food security
02.10.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: A “cosmic snake” reveals the structure of remote galaxies

The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.

Today, astronomers have a pretty accurate idea of how stars were formed in the recent cosmic past. But do these laws also apply to older galaxies? For around a...

Im Focus: Visual intelligence is not the same as IQ

Just because someone is smart and well-motivated doesn't mean he or she can learn the visual skills needed to excel at tasks like matching fingerprints, interpreting medical X-rays, keeping track of aircraft on radar displays or forensic face matching.

That is the implication of a new study which shows for the first time that there is a broad range of differences in people's visual ability and that these...

Im Focus: Novel Nano-CT device creates high-resolution 3D-X-rays of tiny velvet worm legs

Computer Tomography (CT) is a standard procedure in hospitals, but so far, the technology has not been suitable for imaging extremely small objects. In PNAS, a team from the Technical University of Munich (TUM) describes a Nano-CT device that creates three-dimensional x-ray images at resolutions up to 100 nanometers. The first test application: Together with colleagues from the University of Kassel and Helmholtz-Zentrum Geesthacht the researchers analyzed the locomotory system of a velvet worm.

During a CT analysis, the object under investigation is x-rayed and a detector measures the respective amount of radiation absorbed from various angles....

Im Focus: Researchers Develop Data Bus for Quantum Computer

The quantum world is fragile; error correction codes are needed to protect the information stored in a quantum object from the deteriorating effects of noise. Quantum physicists in Innsbruck have developed a protocol to pass quantum information between differently encoded building blocks of a future quantum computer, such as processors and memories. Scientists may use this protocol in the future to build a data bus for quantum computers. The researchers have published their work in the journal Nature Communications.

Future quantum computers will be able to solve problems where conventional computers fail today. We are still far away from any large-scale implementation,...

Im Focus: Wrinkles give heat a jolt in pillared graphene

Rice University researchers test 3-D carbon nanostructures' thermal transport abilities

Pillared graphene would transfer heat better if the theoretical material had a few asymmetric junctions that caused wrinkles, according to Rice University...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

Road into laboratory: Users discuss biaxial fatigue-testing for car and truck wheel

15.11.2017 | Event News

#Berlin5GWeek: The right network for Industry 4.0

30.10.2017 | Event News

 
Latest News

NASA detects solar flare pulses at Sun and Earth

17.11.2017 | Physics and Astronomy

NIST scientists discover how to switch liver cancer cell growth from 2-D to 3-D structures

17.11.2017 | Health and Medicine

The importance of biodiversity in forests could increase due to climate change

17.11.2017 | Studies and Analyses

VideoLinks
B2B-VideoLinks
More VideoLinks >>>