Exponential Growth Bias and Household Finance
Open accessAbstract
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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A lack of financial literacy is associated with excessive debt accumulation.
“In addition, some studies show that a lack of financial literacy is associated with excessive debt accumulation (e.g., Stango and Zinman 2009;Lusardi and Tufano 2015).”
From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as Stango and Zinman 2009
Cites
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Kahneman, D. (2003) · American Economic Review · doi:10.1257/000282803322655392 · Cited by 5,377 · see citing works
Financial literacy and stock market participation
van Rooij, M., Lusardi, A., & Alessie, R. (2011) · Journal of Financial Economics · doi:10.1016/j.jfineco.2011.03.006 · Cited by 3,554 · see citing works
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The Economic Importance of Financial Literacy: Theory and Evidence
Lusardi, A., & Mitchell, O. S. (2014) · Journal of Economic Literature · doi:10.1257/jel.52.1.5 · Cited by 4,698 · see citing works
Financial literacy and stock market participation
van Rooij, M., Lusardi, A., & Alessie, R. (2011) · Journal of Financial Economics · doi:10.1016/j.jfineco.2011.03.006 · Cited by 3,554 · see citing works
Debt literacy, financial experiences, and overindebtedness
LUSARDI, A., & TUFANO, P. (2015) · Journal of Pension Economics and Finance · doi:10.1017/s1474747215000232 · Cited by 1,412 · see citing works
Financial Literacy, Financial Education, and Economic Outcomes
Hastings, J. S., Madrian, B. C., & Skimmyhorn, W. L. (2013) · Annual Review of Economics · doi:10.1146/annurev-economics-082312-125807 · Cited by 1,041 · see citing works
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Financial literacy, financial advice, and financial behavior
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Five steps to planning success: experimental evidence from US households
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The forms of financial literacy overconfidence and their role in financial well‐being
Vörös, Z., Szabó, Z., Kehl, D., Kovács, O. B., Papp, T., & Schepp, Z. (2021) · International Journal of Consumer Studies · doi:10.1111/ijcs.12734 · Cited by 44 · see citing works
- Authors
- STANGO, V., & ZINMAN, J.
- Affiliations
- Dartmouth College (US)
- ORCID
- STANGO, VICTOR
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2009-11-25
- Volume
- 64
- Issue
- 6
- Pages
- 2807-2849
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2168485380
- Cited by
- 828
- References
- 2
- Citations by year
- 2026: 25 · 2025: 42 · 2024: 66 · 2023: 42 · 2022: 75 · 2021: 57 · 2020: 66 · 2019: 64 · 2018: 63 · 2017: 49 · 2016: 37 · 2015: 41 · 2014: 48 · 2013: 44 · 2012: 31
- FWCI
- 120.81
- Type
- journal article
- Language
- en
- Open access
- green
- doi.org
- Locations
- The Journal of Finance (publishedVersion)
- SSRN Electronic Journal (acceptedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy and Behavior
- Keywords
- exponential growth bias, household finance, cognitive biases, interest rate estimation, household borrowing, household savings, financial advice, financial sophistication, behavioral finance
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