How to Decrease the Amortization Bias: Experience vs. Rules

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.

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

“…We are keenly aware that formal formula learning is not for everyone, nor is it the optimal learning method for each household savings and debt decision. In the more complicated debt domain, we find evidence in this paper and in Foltice (2015) that experiential learning could provide more effective and long-lasting retention of reducing bias. In the future, we would like to evaluate more complicated savings questions to determine if this formula learning at the German university level extends to better or worse estimates with and without a calculator.…”

Exponential Growth Bias Matters: Evidence and Implications for Financial Decision Making of College Students in the U.S.A.

“…It also supports Foltice (2015), who find a greater bias improvement over time in the debt domain in the experiential learning group compared to those who received a formula-based learning.…”

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

“…Despite presenting seemingly positive outcomes, research into the propensity of education and training faces challenges of endogeneity in its results (Hastings et al, 2013). A better understanding of causal mechanisms and efficacy of debiasing is required (see Foltice, 2017).…”

“…Furthermore, training content is important. Training that presents a rule of thumb to navigate bias may prove effective immediately afterwards but could be forgotten a few weeks later, which would result in participants reverting to originally biased outcomes (Foltice, 2017).…”