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Exponential growth bias matters: Evidence and implications for financial decision making of college students in the U.S.A

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  • Foltice, Bryan
  • Langer, Thomas

Abstract

This paper tests the exponential growth bias of undergraduate students at a top-level university in the United States and explores the potential drivers that influence the size of this bias. Here, we find that bias matters, even for college students, in making savings and debt decisions. We observe that the individuals who have already taken on debt are more biased in their compound savings estimates, while those who have experience with savings products are less biased. Interestingly, we detect no significant differences in the results between freshmen and upperclassmen, despite the findings that significantly more upperclassmen claim to have previously learned about compounding interest and are more aware of compound growth. We believe that these findings entail some strong policy implications and we urge policy makers in the U.S. to consider both a more extensive compound savings formula training curriculum and a focus on bias “awareness“.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:beexfi:v:19:y:2018:i:c:p:56-63
    DOI: 10.1016/j.jbef.2018.04.002
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    References listed on IDEAS

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    1. Bryan Foltice & Thomas Langer, 2017. "In Equations We Trust? Formula Knowledge Effects on the Exponential Growth Bias in Household Finance Decisions," Decision Analysis, INFORMS, vol. 14(3), pages 170-186, September.
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    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.
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    Cited by:

    1. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    Exponential growth bias; Amortization bias; Household finance; Financial decision-making;
    All these keywords.

    JEL classification:

    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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