Exponential-Growth Bias and Overconfidence

39 Pages Posted: 6 Mar 2015 Last revised: 17 Sep 2016

See all articles by Matthew Levy

Matthew Levy

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

Joshua Tasoff

Claremont Colleges - Claremont Graduate University

Date Written: July 21, 2016

Abstract

There is increasing evidence that people underestimate the magnitude of compounding interest. However, if people were aware of their inability to make such calculations they should demand services to ameliorate the consequences of such deficiencies. In a laboratory experiment we find that people exhibit substantial exponential-growth bias, but, more importantly, that they are overconfident in their ability to answer questions that involve exponential growth. They also exhibit overconfidence in their ability to use a spreadsheet to answer these questions. This evidence explains why a market solution to exponential-growth bias has not been forth- coming. Biased individuals have suboptimally low demand for tools and services that could improve their financial decisions.

Keywords: exponential-growth bias, overconfidence, financial literacy, overestimation, overprecision

JEL Classification: D03, D14, D18

Suggested Citation

Levy, Matthew and Tasoff, Joshua, Exponential-Growth Bias and Overconfidence (July 21, 2016). Available at SSRN: https://ssrn.com/abstract=2574069 or http://dx.doi.org/10.2139/ssrn.2574069

Matthew 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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