Let’s consider exponential-growth bias. A financial decision we are all faced with is whether we save enough for retirement. Let’s consider exponential-growth bias. A behavior bias that affects how much people save is exponential-growth bias. Here’s an excerpt from an article I wrote for my local newspaper on why people do not save enough: The NBER’s working paper The Role of Time Preferences and Exponential-Growth Bias in Retirement Savings . . . addresses “two psychological biases [that] predict that people may save insufficiently for retirement” including: (1) present bias and (2) exponential growth bias. Simply put, present bias is a spend-now-save-later attitude, while exponential growth bias is a misunderstanding of the how fast savings can grow over time. Their paper also addresses how self-awareness of these biases affects retirement saving. . . . the “exponential-growth bias (EGB) is a perceptual bias whereby people underestimate exponential growth due to neglecting compound interest. A person with EGB will underestimate the returns to savings and the costs of holding debt.” Similarly, according to Wolla (2014), “saving while young allows savers to take advantage of compound interest, which allows exponential growth of their money over time. And since more time means more growth, starting to save early makes a big difference.” Class — Are aware of how fast savings can grow over time? How does that awareness or lack of awareness affect your savings?
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