Exponential growth bias matters: Evidence and implications for financial decision making of college students in the U.S.A.

Abstract

This paper tests the exponential growth bias of undergraduate students at a top-level university in the United States and explores the potential drivers that influence the size of this bias. Here, we find that bias matters, even for college students, in making savings and debt decisions. We observe that the individuals who have already taken on debt are more biased in their compound savings estimates, while those who have experience with savings products are less biased. Interestingly, we detect no significant differences in the results between freshmen and upperclassmen, despite the findings that significantly more upperclassmen claim to have previously learned about compounding interest and are more aware of compound growth. We believe that these findings entail some strong policy implications and we urge policy makers in the U.S. to consider both a more extensive compound savings formula training curriculum and a focus on bias “awareness“.