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.

Persistent anchoring to default rates when electing 401(k) contributions

“…Stango and Zinman (2009) conclude that those who lack the understanding of exponential growth “borrow more, save less, and favor shorter maturities.” In a Chinese field study, Song (2015) finds that learning about compound growth can increase pension contributions by about 40 percent. Additionally, in a follow-up study testing US university students, Foltice and Langer (2016) post similar results whereby those college students who understand exponential growth were more likely to have already saved money before graduating college. Thus, we are interested in this study whether taking a finance course, which teaches exponential growth and other basic financial principles, plays a positive role on the elected contribution rate.…”

Boosting the Understanding and Approval of Anti‐Corona Measures–Reducing Exponential Growth Bias and its Effects through Educational Nudges

“…the question of how many times you can fold a piece of paper in half), tend to be perceived as a mathematical curiosity with no actual equivalent in everyday life. Studies that demonstrate the real-world implications of EGB have falsified this assumption by showing the effects of EGB with regard to financial decisions on (retirement) savings and debts (Foltice & Langer, 2018;Goda et al, 2019) or household consumption plans (Levy & Tasoff, 2016;Stango & Zinman, 2009) and find EGB to be linked to a person's general financial literacy (Almenberg & Gerdes, 2012). In addition, people tend to overestimate their own ability to predict exponential growth (Cordes et al, 2019;Levy & Tasoff, 2017) and to perceive their problems in that regard as manifestations of poor mental calculation skills instead of manifestations of a deeper, underlying problem: the poor conceptual understanding of exponential growth.…”

Intuition and exponential growth: bias and the roles of parameterization and complexity

“…However, we need not rely on legend or introspection to find that exponential growth bias is widespread. In recent decades, experimental and empirical research has documented the phenomenon in a variety of domains, including plant growth [ 25 ], pollution [ 23 , 24 ] economic growth [ 4 ], and financial decision-making [ 1 , 4 , 7 , 8 , 12 , 15 , 16 , 18 ]. During the Covid-19 pandemic, exponential growth bias has received both renewed scientific [ 14 , 19 ] and media [ 2 , 5 , 26 ] attention.…”