Exponential Growth Bias and Household Finance

  • Author(s): VICTOR STANGO, JONATHAN ZINMAN
  • Published: Nov 25, 2009
  • Pages: 2807-2849
  • DOI: 10.1111/j.1540-6261.2009.01518.x

ABSTRACT

Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More‐biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication.

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