money illusion
Money illusion is thinking in naira rather than in what naira can buy, which is why a pay rise can feel like progress while you get poorer.
In plain English
Your salary went from ₦400,000 to ₦480,000. That is a 20 percent rise, and it felt like one, and you were pleased.
Prices rose 28 percent that year.
You took a pay cut and celebrated it, and this happens to millions of people every year, in every inflationary country, and almost nobody notices.
Money illusion is the habit of thinking in the number rather than in what the number buys. It is deeply natural, because the number is printed on your payslip and what it buys is not.
It reaches everywhere once you see it. The savings account paying 6 percent that feels safe while inflation runs at 25. The property that doubled in ten years while prices tripled, sold at a celebrated profit that was actually a loss. The bond paying a comfortable fixed rate that quietly repays you in money worth far less than the money you lent.
The cure is a single habit and it takes ten seconds. Whenever you see a return, a rise or a gain, subtract inflation before you feel anything about it.
Whatever survives that subtraction is the truth. Everything else is decoration.
Your ₦2 million investment grows to ₦2.4 million in a year, which is 20 percent. Inflation was 26 percent. You have more naira and less wealth, and your investment app is congratulating you.
Questions people ask
What is a real return?
Your return after inflation is removed. It is the only return that reflects whether you actually became better off.
Why is this so common in Nigeria?
Because inflation has been high enough for long enough that nominal numbers are routinely misleading. A 20 percent gain can be a loss here.
How do I avoid it?
Make one habit permanent. Every time you see a return, subtract inflation before you react to it.
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