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Exponential-growth bias and overconfidence

Levy, Matthew R. and Tasoff, Joshua (2017) Exponential-growth bias and overconfidence. Journal of Economic Psychology, 58. pp. 1-14. ISSN 0167-4870

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Identification Number: 10.1016/j.joep.2016.11.001

Abstract

There is increasing evidence that people underestimate the magnitude of compounding interest. However, if people were aware of their inability to make such calculations they should demand services to ameliorate the consequences of such deficiencies. In a laboratory experiment, we find that people exhibit substantial exponential-growth bias but, more importantly, that they are overconfident in their ability to answer questions that involve exponential growth. They also exhibit overconfidence in their ability to use a spreadsheet to answer these questions. This evidence explains why a market solution to exponential-growth bias has not been forthcoming. Biased individuals have suboptimally low demand for tools and services that could improve their financial decisions.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/01674...
Additional Information: © 2016 Elsevier
Divisions: Economics
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance
D - Microeconomics > D1 - Household Behavior and Family Economics > D18 - Consumer Protection
Sets: Departments > Economics
Date Deposited: 17 Jan 2017 12:50
Last Modified: 20 Jun 2019 02:33
URI: http://eprints.lse.ac.uk/id/eprint/68881

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