Exponential Growth Bias Matters: Evidence and Implications for Financial Decision Making of College Students in the U.S.A.
Journal of Behavioral and Experimental Finance, 19(2018), 56-63
43 Pages Posted: 27 Jun 2015 Last revised: 4 Oct 2018
Date Written: May 5, 2015
This paper tests the exponential growth bias of undergraduate students at a top-level university in the United States and explores the potential drivers of this bias. We find that bias matters, even for college students, in making savings and debt decisions. In this sample, we observe that the individuals who have already taken on debt are more biased, while those who have experience with savings products are less biased. Moreover, those classified as possessing an awareness of compound growth as well as an ability to consistently calculate the compound savings equation are significantly less biased in different savings treatments than those who are unable to make the calculation, further demonstrating that learning the formula may also aid in making better intuitive estimates. Interestingly, we detect no significant differences of university learning in the results between freshmen and upperclassmen, with the exceptions that significantly more upperclassmen claim to have previously learned about compounding interest and are more aware of compound growth. We believe that these findings entail some strong policy implications and we urge policy makers to consider both a more extensive compound savings formula training curriculum to the current Common Core State Standards Initiative and a more experientially-based learning curriculum with a focus on bias “awareness” for these important savings and debt decisions.
Keywords: Exponential growth bias, household finance, amortization bias
JEL Classification: A2, C91, D14
Suggested Citation: Suggested Citation