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Exponential Growth Bias: Theory and Experiments


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Principal Investigator(s):

Joshua Tasoff
Claremont Graduate University
Email: joshua.tasoff@cgu.edu
Home page: https://sites.google.com/site/joshtasoff/

Matthew Levy
London School of Economics and Political Science
Email: m.r.levy@lse.ac.uk
Home page: http://www.lse.ac.uk/economics/people/facultyPages/MatthewLevy.aspx

Sample size:1400
Field period:5/1/2012-5/30/2012

 

Abstract:

Exponential-growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US-representative population and find substantial bias, with approximately one-third of subjects estimated as the fully-biased type. The magnitude of the bias is negatively associated with asset accumulation, and robust to a simple graphical intervention.

Hypotheses:

What is the extent of EGB in the U.S. population?

What are the financial correlates of EGB?

Can EGB be mitigated with a simple interactive graph typical of many investment websites?

Experimental Manipulations:

A fraction of the subjects received a simple interactive graph typical of many investment websites.

Key Dependent Variables:

EGB as measured by subject responses on financial questions that involve compounding interest.

Summary of Findings:

We find vast EGB. One third of Americans do not compound interest. Furthermore, EGB is highly correlated with assets. Going from full bias to full accuracy is associated with a ceteris paribus 55–90% increase in accumulated assets. The graphical intervention did not have a significant effect on EGB.

Additional Information:

The TESS portion of our study is Experiment 2 of a three-experiment paper.

References

Levy, Matthew R. and Tasoff, Joshua, Exponential-Growth Bias and Lifecycle Consumption (June 1, 2013). Available at SSRN: http://ssrn.com/abstract=2144358 or http://dx.doi.org/10.2139/ssrn.2144358


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