We are biased to focus on the nominal amounts, not real money terms, both in our financial life and in poker.
One of the real gifts poker has given me is that it has been a great jumping off point to learn things from other disciplines like economics, AI, psychology and Game Theory. So here is a series of articles where I bring some of the most interesting things I have learned from other subjects outside of poker which are applicable in this game we know and love.
The concept of the Money Illusion is a crucial but often overlooked aspect of economics. It refers to the tendency of people to think of currency in nominal terms rather than real terms. This means that individuals often overlook the effects of inflation on their purchasing power and focus solely on the face value of money.
The term “money illusion” was popularized by economist Irving Fisher in his 1928 book “The Money Illusion.” Fisher observed that people tend to confuse nominal values (the face value of money) with real values (the purchasing power of money). This misperception leads to errors in judgment about financial and economic conditions. Fisher’s work highlighted how failing to account for inflation could distort individuals’ understanding of their economic situation and decision-making processes.
To illustrate, imagine receiving a 5% raise in your salary. On the surface, this seems like a positive development, and you might feel richer. However, if the inflation rate is 6%, the real value of your income has actually decreased. Your purchasing power has diminished because prices have risen faster than your salary. Despite the higher nominal income, you can buy less than before. This discrepancy is the essence of the Money Illusion.
The Myth of the All-Time Money List
Two things come to mind when applying the Money Illusion to poker.
The first is how unreliable looking at any individual poker result is. You see somebody win $1 million and assume they are a millionaire.
The reality is that the players likely sold percentages of themselves, and/or had probably been on some sort of downswing leading up to that point.
The All-Time Money list in poker is particularly guilty of this. It only shows wins, not profit. Not only could a big winner on it have been staked, but there are famous examples where players had losing years that looked like big winning periods.
Another common error in the poker sense is not understanding ICM. One of the biggest errors you can make on a money bubble is to play ChipEV strategy and not consider the financial implications of your decisions. This is a poker example on focussing on the nominal (the chips) rather than the real money considerations (the payouts).
What theories from outside of poker have helped your game? Let us know in the comments.