The average person in Canada likely knows at least a bit about money, including the need to earn money in order to spend it. Beyond that basic level, however, their knowledge might be a bit vague, especially regarding a concept that financial analysts call money illusion.
Jeffrey Lipton, Permanent Value
Asset Management: Explaining
The average person in Canada likely knows at least a bit
about money, including the need to earn money in order to
spend it. Beyond that basic level, however, their knowledge
might be a bit vague, especially regarding a concept that
financial analysts call money illusion.
Suppose that a pair of sisters lived in two different cities.
Both worked at the same type of job, but one earned $5,000
per year more than the other. However, her annual expenses
were almost $6,000 more than her sister’s because of the
cost of food and housing.
Most people, once they thought the scenario through, would
realize that the first sister was really better off than the second,
despite her lower salary. However, a few people, in listening to
that story, might think that the sister with the higher salary was
richer. This is an example of money illusion, a concept that
centres around viewing money in nominal terms, as opposed to
its true purchasing power.
According to research by Ernst Fehr from the University of Zurich
and Jean-Robert Tyran from the University of Copenhagen,
money illusion can have a highly detrimental effect on the
economy. This is especially the case when business owners
respond to inflation by raising prices, but fail to lower them at
times of deflation. The fear of losing profits thus translates into
higher prices for consumers, who might respond by buying less
or choosing to shop elsewhere, as often happens with cross-
border shopping by Canadians.
Jeffrey Lipton, a Barbados executive, has seen first-hand the
negative effects of money illusion. He is an international finance
expert and a Senior Manager. Previously, Jeffrey Lipton held
executive investment management positions at Berkeley
Hanover, as well as at Permanent Value Asset Management.
A prime example of money illusion is in the area of minimum
wage over the last few decades. Although the amount of money
that minimum wage workers receive has increased, the actual
gains have been extremely small, given cost of living increases
and inflation rates. Thus, people might think that they are
earning more, while they might actually be falling further
In fact, the Globe and Mail reports that when wages are adjusted
for inflation, minimum wage workers have received
approximately a one cent raise over the past twenty years.
Although they are earning more money than in the past, they
have not managed to benefit from the increase.
For Barbados’ Jeffrey Lipton, the gap between wages and
purchasing power has made asset management essential. Much
of Jeffrey Lipton’s work has centred around helping clients gain
the best return from their investments. With current interest
rates in countries like Canada and the United States hovering at
about .5%, many people are having trouble earning much on
their savings. That’s making investment guidance from
executives like Jeffrey Lipton even more critical.
With more individuals looking to invest their money, rather than
simply put it in savings accounts, investors need to be sure of the
benefits and risks in their investment choices. In Jeffrey Lipton’s
view , “No stock or investment choice is a sure bet all of time.
However, there are ways to gauge and monitor investment risk
...” With expert monitoring, people can “diversify an existing
portfolio while also offering the potential for return on
Although some financial experts disagree as to how much of an
impact money illusion truly has on daily monetary transactions,
it’s important to be generally familiar with the concept and to
understand that there’s a difference between the numerical
value of money and its true purchasing power. Investopedia
offers a helpful explanation of the concept. For an even more in-
depth look at the concept and general monetary policy, check