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A miscalculated risk: Investment choices under exponential growth bias

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  • Basu, Karna

Abstract

“Exponential growth bias” – the tendency to underestimate exponential growth – has been shown to affect how much people save and borrow. I develop a simple theoretical framework to show that this bias, through its interaction with individual risk preferences, also affects how people save and borrow. Relatively risk-tolerant consumers will choose inefficiently safe investments, appearing more risk-averse than they are. In contrast, relatively risk-averse consumers will choose inefficiently risky investments, appearing less risk-averse than they are. I present survey data to support this hypothesis. The model introduces a new perspective on some apparent anomalies in intertemporal choice and raises additional considerations for consumer protection and financial literacy programs.

Suggested Citation

  • Basu, Karna, 2026. "A miscalculated risk: Investment choices under exponential growth bias," Journal of Economic Behavior & Organization, Elsevier, vol. 243(C).
    • Handle: RePEc:eee:jeborg:v:243:y:2026:i:c:s0167268125004822
    DOI: 10.1016/j.jebo.2025.107365
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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