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Exponential-Growth Bias

Matthew R. Levy

London School of Economics & Political Science (LSE) - Department of Economics

Joshua Tasoff

Claremont Colleges - Claremont Graduate University

February 7, 2014

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 confirm our predictions in a simulated lifecycle-consumption task. 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. Finally, we show laboratory subjects are largely unaware of their bias and undervalue assistance.

Number of Pages in PDF File: 62

Keywords: exponential-growth bias, dynamic inconsistency, personal finance, overconsumption, lifecycle consumption, overconfidence

JEL Classification: D03, D11, D12, D14, D18, D91, E21

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Date posted: September 10, 2012 ; Last revised: February 8, 2014

Suggested Citation

Levy, Matthew R. and Tasoff, Joshua, Exponential-Growth Bias (February 7, 2014). Available at SSRN: http://ssrn.com/abstract=2144358 or http://dx.doi.org/10.2139/ssrn.2144358

Contact Information

Matthew R. Levy
London School of Economics & Political Science (LSE) - Department of Economics ( email )
Houghton Street
London WC2A 2AE
United Kingdom
Joshua Tasoff (Contact Author)
Claremont Colleges - Claremont Graduate University ( email )
150 E. Tenth Street
Claremont, CA 91711
United States
HOME PAGE: http://sites.cgu.edu/tasoffj/
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