Exponential Growth Bias and Household Finance

67 Pages Posted: 14 Jan 2008 Last revised: 8 Oct 2008

See all articles by Victor Stango

Victor Stango

UC Davis Graduate School of Management

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Date Written: October 1, 2008

Abstract

Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential bias can explain two systematic biases in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More-biased households borrow more, save less, favor shorter maturities for debt and assets, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication.

Keywords: exponential growth, household finance, behavioral finance

JEL Classification: D1

Suggested Citation

Stango, Victor and Zinman, Jonathan, Exponential Growth Bias and Household Finance (October 1, 2008). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1081633 or http://dx.doi.org/10.2139/ssrn.1081633

Victor Stango (Contact Author)

UC Davis Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Jonathan Zinman

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-0075 (Phone)

HOME PAGE: http://https://sites.dartmouth.edu/jzinman/

Innovations for Poverty Action

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

Jameel Poverty Action Lab

E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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