No abstract

Abstract:We conduct an experimental study that tests the effectiveness of de-biasing a certain form of exponential growth bias found in household finance debt decisions, called the amortization bias. We provide 251 bachelor students at a German university with a short tutorial based on one of three learning methods: experiential learning, learning a simple "I Owe More" debt rule-of-thumb, as well as learning an extended, but more accurate version of the "I Owe More" debt rule. Immediately after completing these tutorials, we retest for the amortization bias and find a significant bias improvement in all three treatments. More importantly, after confronting the same participants with similar debt scenarios approximately three weeks later, we find that those who had previously received a debt tutorial maintain a significantly larger bias improvement over the control group. However, during this short period, most of the individuals who learned the simple and complex rules-of-thumb could no longer apply the rule and reverted back to their biased answers, while the experiential learning group best retained their improvement in bias. We find evidence in this experiment that experience-based learning may be better suited to produce long-lasting improvements for attenuating the amortization bias.

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.

Previous research shows that individuals make systematic errors when judging exponential growth, which has harmful effects for their financial well-being. This study analyzes how far individuals are aware of their errors and how these errors are shaped by arithmetic and conceptual problems. Whereas arithmetic problems could be overcome using 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 multitier 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 policymaking and financial advisory practice and can help to design effective approaches to mitigate the detrimental effects of misperceived exponential growth.

Exponential growth effects play a major role in many household finance decisions. A systematic bias in dealing with exponential growth can lead to poor savings and debt decisions. In this paper, we extend previous research on the exponential growth bias in the savings and debt domains and provide a first experimental link between these two important fields of consumer financial decision making. We develop a measure for the exponential growth bias that naturally extends over different domains and parameter settings, and we explore the ramifications of being acquainted with the basic formula of exponential savings growth. Specifically, we analyze whether such formula knowledge helps only in calculating simple compound interest scenarios with a pocket calculator or if it provides benefits that go beyond this narrow field of application. We observe that—even without a pocket calculator—individuals who know the compound interest formula provide less biased estimates for problems from the savings domain and also for slightly more complicated debt amortization problems that also build on exponential growth effects. We conclude that being acquainted with the compound interest formula provides some intuitive grasp of exponential effects that can be helpful in a broader range of household finance decisions. At the same time, we observe that too much dependence on a calculator can have adverse effects: when equipped with a pocket calculator, a number of participants, both aware and unaware of the compound savings formula, provided persistently insensible answers greater than the initial loan balance in the debt domain.