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Exponential Growth Bias and Financial Literacy

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Author Info

  • Almenberg, Johan

    ()
    (Ministry of Finance, Sweden)

  • Gerdes, Christer

    ()
    (SOFI, Stockholm University)

Abstract

The tendency to underestimate the future value of a variable growing at a constant rate, an example of exponential growth bias, has been linked to household financial decision making. We show that exponential growth bias and standard measures of financial literacy are negatively correlated in a representative sample of Swedish adults. Since financial literacy is linked to household decision making, our results indicate that examining the relationship between exponential growth bias and household finance without adequate controls for financial literacy may generate biased results.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5814.

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Length: 8 pages
Date of creation: Jun 2011
Date of revision:
Publication status: published in: Applied Economics Letters, 2012, 19 (17), 1693-1696
Handle: RePEc:iza:izadps:dp5814

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Related research

Keywords: financial literacy; exponential growth bias; household finance;

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References

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  1. James Banks & Zoe Oldfield, 2007. "Understanding Pensions: Cognitive Function, Numerical Ability and Retirement Saving," Fiscal Studies, Institute for Fiscal Studies, vol. 28(2), pages 143-170, 06.
  2. John J. McArdle & James P. Smith & Robert Willis, 2011. "Cognition and Economic Outcomes in the Health and Retirement Survey," NBER Chapters, in: Explorations in the Economics of Aging, pages 209-233 National Bureau of Economic Research, Inc.
  3. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2008. "Cognitive abilities and portfolio choice," CFS Working Paper Series 2008/35, Center for Financial Studies (CFS).
  4. Lusardi, Annamaria & Mitchell, Olivia S., 2006. "Baby boomer retirement security: The roles of planning, financial literacy, and Housing wealth," CFS Working Paper Series 2006/20, Center for Financial Studies (CFS).
  5. Sumit Agarwal & John C Driscoll & Xavier Gabaix & David Laibson, 2007. "The Age of Reason: Financial Decisions Over the Lifecycle," Levine's Bibliography 122247000000001752, UCLA Department of Economics.
  6. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
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Cited by:
  1. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.
  2. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Exponential Discounting Bias," Working Papers Series 2 12-05, ISCTE-IUL, Business Research Unit (BRU-IUL).

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