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Exponential-Growth Bias and Lifecycle Consumption

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  • Matthew Levy
  • Joshua Tasoff

Abstract

Exponential-growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US-representative population and find substantial bias, with approximately one third of subjects estimated as the fully biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.

Suggested Citation

  • Matthew Levy & Joshua Tasoff, 2016. "Exponential-Growth Bias and Lifecycle Consumption," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 545-583.
  • Handle: RePEc:oup:jeurec:v:14:y:2016:i:3:p:545-583.
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    File URL: http://hdl.handle.net/10.1111/jeea.12149
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    References listed on IDEAS

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    1. Gopi Shah Goda & Colleen Flaherty Manchester & Aaron Sojourner, 2012. "What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving," NBER Working Papers 17927, National Bureau of Economic Research, Inc.
    2. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2018. "Hidden Skewness: On the Difficulty of Multiplicative Compounding Under Random Shocks," Management Science, INFORMS, vol. 64(4), pages 1693-1706, April.
    3. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
    4. Goda, Gopi Shah & Manchester, Colleen Flaherty & Sojourner, Aaron J., 2014. "What will my account really be worth? Experimental evidence on how retirement income projections affect saving," Journal of Public Economics, Elsevier, vol. 119(C), pages 80-92.
    5. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    6. Benzion Uri & Granot Alon & Yagil Joseph, 1992. "The valuation of the exponential function and implications for derived interest rates," Economics Letters, Elsevier, vol. 38(3), pages 299-303, March.
    7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, March.
    8. Victor Stango & Jonathan Zinman, 2011. "Fuzzy Math, Disclosure Regulation, and Market Outcomes: Evidence from Truth-in-Lending Reform," Review of Financial Studies, Society for Financial Studies, vol. 24(2), pages 506-534.
    9. 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. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2018. "Hidden Skewness: On the Difficulty of Multiplicative Compounding Under Random Shocks," Management Science, INFORMS, vol. 64(4), pages 1693-1706, April.
    2. Foltice, Bryan & Langer, Thomas, 2018. "Exponential growth bias matters: Evidence and implications for financial decision making of college students in the U.S.A," Journal of Behavioral and Experimental Finance, Elsevier, vol. 19(C), pages 56-63.
    3. Abel, Martin & Byker, Tanya & Carpenter, Jeffrey P., 2020. "Socially Optimal Mistakes? Debiasing COVID-19 Mortality Risk Perceptions and Prosocial Behavior," IZA Discussion Papers 13560, Institute of Labor Economics (IZA).
    4. Bohr, Clement E. & Holt, Charles A. & Schubert, Alexandra V., 2019. "Assisted savings for retirement: An experimental analysis," European Economic Review, Elsevier, vol. 119(C), pages 42-54.
    5. Levy, Matthew R. & Tasoff, Joshua, 2017. "Exponential-growth bias and overconfidence," LSE Research Online Documents on Economics 68881, London School of Economics and Political Science, LSE Library.
    6. Goda, Gopi Shah & Levy, Matthew R. & Manchester, Colleen Flaherty & Sojourner, Aaron & Tasoff, Joshua, 2020. "Who is a passive saver under opt-in and auto-enrollment?," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 301-321.
    7. Levy, Matthew R. & Tasoff, Joshua, 2017. "Exponential-growth bias and overconfidence," Journal of Economic Psychology, Elsevier, vol. 58(C), pages 1-14.
    8. Banerjee, Ritwik & Bhattacharya, Joydeep & Majumdar, Priyama, 2021. "Exponential-growth prediction bias and compliance with safety measures related to COVID-19," Social Science & Medicine, Elsevier, vol. 268(C).
    9. Matthew Olckers, 2020. "On Track for Retirement?," Papers 2005.01692, arXiv.org, revised Sep 2020.
    10. Bonaccorsi, Andrea & Apreda, Riccardo & Fantoni, Gualtiero, 2020. "Expert biases in technology foresight. Why they are a problem and how to mitigate them," Technological Forecasting and Social Change, Elsevier, vol. 151(C).

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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