Matthew R. Levy
London School of Economics & Political Science (LSE) - Department of Economics
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, E21working papers series
Date posted: September 10, 2012 ; Last revised: February 8, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.625 seconds