Misperception of Exponential Growth: Are People Aware of their Errors?

Decision Analysis, Forthcoming

38 Pages Posted: 11 Mar 2018 Last revised: 3 Jul 2019

See all articles by Henning Cordes

Henning Cordes

University of Muenster - Finance Center

Bryan Foltice

Butler University

Thomas Langer

University of Muenster - Finance Center

Date Written: July 2, 2019

Abstract

Previous research shows that individuals make systematic errors when judging exponential growth, which has harmful effects for their financial well-being. This study analyzes in how far individuals are aware of their errors and how these errors are shaped by arithmetic and conceptual problems. While arithmetic problems could be overcome by employing computational assistance like a pocket calculator, this is not the case for conceptual problems, a term we use to subsume other error drivers like a general misunderstanding of exponential growth or overwhelming task complexity. In an incentivized experiment, we find that participants strongly overestimate the accuracy of their intuitive judgment. At the same time, their willingness to pay for arithmetic assistance is too high on average, often much above the actual benefits a calculator provides. Using a multi-tier system of task complexity we can show that the willingness to pay for arithmetic assistance is hardly related to its benefits, indicating that participants do not really understand how the interplay of arithmetic and conceptual problems shape their errors in exponential growth tasks. Our findings are relevant for policy making and financial advisory practice and can help to design effective approaches to mitigate the detrimental effects of misperceived exponential growth.

Keywords: Exponential growth bias; Overconfidence; Bias awareness

JEL Classification: D14; D18; D83

Suggested Citation

Cordes, Henning and Foltice, Bryan and Langer, Thomas, Misperception of Exponential Growth: Are People Aware of their Errors? (July 2, 2019). Decision Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3138109 or http://dx.doi.org/10.2139/ssrn.3138109

Henning Cordes (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22058 (Phone)

Bryan Foltice

Butler University ( email )

Indianapolis, IN 46208
United States

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

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