Exponential growth bias matters: Evidence and implications for financial decision making of college students in the U.S.A.

Abstract

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.

How to better communicate the exponential growth of infectious diseases

“…Teaching is a potential instrument by which to reduce the exponential growth bias, however, the evidence on its effectiveness is mixed. Sometimes teaching about exponential growth (bias) partially reduces bias [22,23], while other times it has almost no impact [18,21]. In line with this, being aware of exponential growth bias does not prevent subjects in our sample from drastically underestimating exponential growth.…”

“…Public support for and adherence to such measures depends on the correct assessment of their benefits by the public and/or by opinion and community leaders. Previous research [11][12][13][14][15][16][17][18][19][20][21][22][23] has shown that people underestimate exponential growth. For financial contexts, empirical research has shown that a biased perception of exponential growth causally affects real-world behavior [17], and in the infectious disease context, recent lab evidence suggests the same [22].…”

Towards an integrated debiasing framework for consumer financial decisions: A reflection on debiasing research

“…Other positive financial behaviour can arise from formal financial education, such as reduced debt default rates and increased credit scores (Brown et al, 2016; Urban et al, 2020). There is also evidence to suggest self‐attribution bias increases with education levels (Mishra & Metilda, 2015), although formal classroom education on compound interest was not found to reduce exponential growth bias (Foltice & Langer, 2018).…”

Guessing, math, or something else? Lay people's processes for valuing annuities

“…Initiatives to improve financial literacy often have limited success (Fernandes et al, 2014). The effectiveness of de-biasing and providing decision support seem to crucially depend on decision-makers' capabilities and (potentially biased) awareness of their skills (Cordes et al, 2019;Foltice & Langer, 2018) Hoeken, 2021;Sunstein, 2017). Our results demonstrate that investigating judgment and decision-making at a very basic process level helps to improve and deepen our understanding of how individuals approach such decisions and, therefore, provides a basis to design effective interventions or, depending on the results, to opt for other strategies.…”