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Exponential Growth Bias and Financial Literacy

  • Almenberg, Johan

    ()

    (Ministry of Finance, Sweden)

  • Gerdes, Christer

    ()

    (SOFI, Stockholm University)

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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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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  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. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," CeRP Working Papers 54, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  3. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2007. "The Age of Reason: Financial Decisions Over the Lifecycle," NBER Working Papers 13191, National Bureau of Economic Research, Inc.
  4. Dimitrios Christelis & Tullio Jappelli & Mario Padula, 2006. "Cognitive Abilities and Portfolio Choice," CSEF Working Papers 157, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  5. McArdle, John J. & Smith, James P. & Willis, Robert, 2009. "Cognition and Economic Outcomes in the Health and Retirement Survey," IZA Discussion Papers 4269, Institute for the Study of Labor (IZA).
  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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