Exponential-Growth Bias and Lifecycle Consumption

46 Pages Posted: 10 Sep 2012 Last revised: 12 Jan 2015

Matthew R. Levy

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

Joshua Tasoff

Claremont Colleges - Claremont Graduate University

Date Written: January 8, 2015

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 intertemporal 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 does not respond to a simple graphical intervention.

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

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

Suggested Citation

Levy, Matthew R. and Tasoff, Joshua, Exponential-Growth Bias and Lifecycle Consumption (January 8, 2015). Available at SSRN: https://ssrn.com/abstract=2144358 or http://dx.doi.org/10.2139/ssrn.2144358

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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