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Individual preferences and the exponential growth bias

Author

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  • Königsheim, C.
  • Lukas, M.
  • Nöth, M.

Abstract

The exponential growth bias (EGB) refers to individuals’ underestimation of the effects of exponential growth and has been shown to affect important financial decisions such as retirement savings. We develop and test a novel experimental design to evaluate the magnitude of the EGB based on multiple price lists. Our design simultaneously elicits the EGB as well as subjects’ utility curvatures and time preferences. Allowing for non-linear utility, we structurally estimate the magnitude of the EGB as about half as large as when linear utility is assumed. These results shed light on the relationship between individual preferences and the EGB.

Suggested Citation

  • Königsheim, C. & Lukas, M. & Nöth, M., 2018. "Individual preferences and the exponential growth bias," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 352-369.
  • Handle: RePEc:eee:jeborg:v:145:y:2018:i:c:p:352-369
    DOI: 10.1016/j.jebo.2017.07.032
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    References listed on IDEAS

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    More about this item

    Keywords

    Time preferences; Exponential growth bias; Multiple price lists; Maximum likelihood estimation;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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