Mathematics, Psychology, and Law: The Legal Ramifications of the Exponential Growth Bias

Abstract

Many human decisions, ranging from the taking of loans with compound interest to fighting deadly pandemics, involve phenomena that entail exponential growth. Yet a wide and robust body of empirical studies demonstrates that people systematically underestimate exponential growth. This phenomenon, dubbed the exponential growth bias (EGB), has been documented in numerous contexts, across different populations, using both experimental and observational methods.

Despite its centrality to human decision making, legal scholarship has thus far failed to account for the EGB. This Article presents the first comprehensive study of EGB and the law. Incorporating the EGB into legal analysis sheds new light on legal measures that are already in use, and highlights new solutions to numerous problems that the law strives to solve. More concretely, the EGB calls for the introduction of new disclosure duties that would assist people grasp the long-term implications of their choices; the imposition of new mandatory rules that would minimize the exploitation of the EGB by savvy profit-maximizing entrepreneurs; and the adoption of new debiasing techniques that could improve policymakers’ decisions.

Keywords: exponential growth bias, disclosures, pensions, consumer credit, compound interest, pyramid schemes, pandemic, global warming, behavioral law and economics, debiasing

JEL Classification: D03, D11, D14, D18, G02, G18, G28, K, K12, K2, K32