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For international travelers, the 'money illusion' can cost plenty

A few hundred rupees here, a few thousand yen there and pretty soon you’re talking real money — especially if you’re an American traveling overseas and miscalculating the actual cost of the things you buy.

It may be a more common problem than you think. According to Priya Raghubir, a research professor at New York University’s Stern School of Business and lead author on a new report on the subject, many international travelers suffer from a “money illusion” that causes them to overspend even when they understand exchange rates and currency conversions.

“Arithmetically, converting currency is a trivial task — you divide one number by another number to come up with the correct amount,” said Raghubir. “But what happens instead is that people focus on the face value of a price, which leads them to think the product is more or less expensive than it really is.”

Let’s say, for example, that you’re in need of caffeine in Mumbai, where a cup of coffee costs 100 rupees. It sounds like a lot, when in fact, it’s only $1.80 at current exchange rates.

“People just aren’t used to paying 100 of anything for a cup of coffee,” said Raghubir, which may lead them to forgo a purchase that’s actually a good deal. The same scenario applies whether it’s a 500-peso mask in Mazatlan (around $37), a 5,000-rupiah snack in Jakarta (52 cents) or a 20,000-yen camera in Tokyo (around $255).

The reverse scenario plays out in places where the face value of the local currency is higher than the U.S. dollar. The classic example is Europe, where people mistakenly interpret euro prices as equivalent to dollar prices when, in fact, every euro you spend costs you about $1.25.

Factor in a week’s worth of hotels, meals and transportation, and the so-called money illusion can translate into the cold slap of reality when you get home and open your credit card bill.

And even business school professors aren’t immune to it. As Raghubir tells it, she recently booked a week at a Greek villa for 10,000 euros. "In my head, my budget was $10,000," she told NBC News. "But I said, 'Oh, it’s 10,000 — it comes in at exactly what I wanted to spend.' Instead, I went 25 percent over budget."

The simple solution, of course, is to carry a calculator or, better yet, a currency-conversion app, such as Currency+, GlobeConvert or XE Currency. Most will automatically update as exchange rates change and can be used offline to avoid roaming fees.

Better yet, all of the above apps are free, which is a price that translates favorably in any currency.

Rob Lovitt is a longtime travel writer who still believes the journey is as important as the destination. Follow him on Twitter.

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