Tuesday, March 24, 2020

People exhibit exponential-growth bias, overconfidence in calculating exponential growth, overconfidence in ability to use spreadsheets, & low demand for tools/services that improve financial decisions

Exponential-growth bias and overconfidence. Matthew R. Levy, Joshua Tasoff. Journal of Economic Psychology, Volume 58, February 2017, Pages 1-14. https://doi.org/10.1016/j.joep.2016.11.001

• We measure exponential-growth bias and overconfidence in a laboratory experiment.
• People exhibit exponential-growth bias.
• People exhibit overconfidence in their ability to calculate exponential growth.
• People exhibit overconfidence in their ability to use a spreadsheet.
• The results suggest insufficient demand for help and tools.

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.

Keywords: Exponential-growth biasOverconfidenceFinancial literacyOverestimationOverprecision
JEL classification D03 D14 D18

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