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Exponential Growth Bias and Household Finance

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  • VICTOR STANGO
  • JONATHAN ZINMAN

Abstract

Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More‐biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication.

Suggested Citation

  • Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
    • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2807-2849
    DOI: 10.1111/j.1540-6261.2009.01518.x
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