EXPONENTIAL-GROWTH BIAS AND LIFECYCLE CONSUMPTION

EXPONENTIAL-GROWTH BIAS AND LIFECYCLE CONSUMPTION

Exponential-growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incenti...

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Bibliographic Details
Published in:Journal of the European Economic Association Vol. 14; no. 3; pp. 545 - 583
Main Authors: Levy, Matthew, Tasoff, Joshua
Format: Journal Article
Language:English
Published: Oxford Wiley Blackwell for the European Economic Association (EEA) 01-06-2016
Oxford University Press
Subjects:
Bias
D03
D11
D12
D14
D18
D91
E21
Economic models
Economic theory
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Summary:Exponential-growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US-representative population and find substantial bias, with approximately one third of subjects estimated as the fully biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.
Bibliography:The editor in charge of this paper was Nicola Gennaioli
Acknowledgments: We would like to gratefully acknowledge the financial support of a Fletcher Jones Foundation Faculty Research Grant from Claremont Graduate University and Time‐sharing Experiments for the Social Sciences (TESS; NSF Grant 0818839). We thank Masyita Crystallin, Peiran Jiao, Andrew Royal, Quinn Keefer, and Oliver Curtiss for research assistance, and Ananda Ganguly, Matthew Rabin, Paige Skiba, Justin Sydnor, Charles Thomas, Jonathan Zinman, various seminar participants, and three anonymous referees for helpful comments. Institutional Review Board approval was obtained from OHRPP at UCLA (IRB #12‐001092) and CGU (IRB #1591).
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ISSN:1542-4766
1542-4774
DOI:10.1111/jeea.12149