Exploring how anticipated (and actual) financial constraints impact the money illusion: evidence from Italy

Populations have been aging at a fast pace globally, putting a strain on health, social, and financial systems, such as retirement funds. Governments and firms have thus been making various policy reforms, such as to their retirement plans, that can have detrimental consequences for consumers’ financial wellbeing, especially for those who anticipate (e.g., based on one’s pension projection) or are currently (e.g., based on one’s current pension) experiencing financial constraints. It is thus crucial that consumers accurately understand the implications of policy changes. However, consumers’ judgment can be misled by cognitive biases, such as the money illusion, which occurs when they think in terms of nominal rather than real values when evaluating monetary amounts, and which can lead them to support detrimental policy changes. Across three studies, we demonstrate that anticipated (and actual) financial constraints – stemming from one’s anticipated (or current) monthly retirement pension – exacerbates the money illusion for Italian consumers, such that more (vs. less) financially constrained participants expressed greater support for relatively detrimental (vs. beneficial) pension reforms. We further provide preliminary evidence that financial constraints impair fluid, but not crystallized, intelligence, which helps explain their effect on the money illusion. Overall, our findings help better understand how anticipating or actually experiencing financial constraints may impact consumers’ likelihood of falling prey to cognitive biases that can worsen their long-term (or immediate) financial situation.