Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation.

This article examines how individual investors responded to inflation during the German hyperinflation from 1920 to 1924, using a unique dataset of over 2,000 private clients' security portfolios from a German bank. The main finding is that investors bought fewer and sold more stocks when facing higher local inflation, an effect stronger among less sophisticated investors and for stocks where money illusion—the tendency to misinterpret nominal values without fully accounting for inflation—is more likely. The study also finds a positive relationship between local inflation and foregone returns after stock sales, suggesting investors' valuation errors consistent with money illusion. Alternative explanations such as changes in economic prospects, risk aversion, consumption needs, or shifts to other asset classes were tested and found unlikely to drive the results. This research provides the first direct empirical evidence that individual investors' behavior during inflationary periods aligns with money illusion, highlighting concerns about financial literacy in the context of rising inflation.