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  • Thumbnail for The Variable Effects of Exposure and Experience on Future Exponential Growth Bias
    The Variable Effects of Exposure and Experience on Future Exponential Growth Bias by Holland, Benjamin

    Exponential growth bias (EGB) is a largely unnoticed bias that plagues the financial decision making of most individuals in the United States. It is characterized as the tendency to linearize exponential compound saving and interest rates, and it shows itself through poor decision making around wrong estimates and/or no understanding of how money grows through time. Based on the theory that education and valid experience might tame EGB, a model was built to measure variable drivers of individual EGB related to exposure. Based on previous theory that more extreme situations demand more incentive for participation, it was hypothesized that the government dictated interest rates at times of individual’s first home purchases could subconsciously influence EGB, for two main reasons. First, a more expensive payment plan carries greater incentive to fully understand, and second, a first home purchase is a fundamentally monumental financial decision with potential to positively or negatively shape bias. A variable for interest rate at the time of a first home purchase was created a combined with more lifetime-housing-exposure variables theorized to influence EGB, to model overall effects of individual housing exposure on EGB. The results showed that government set interest rates hold no statistically significant influence on an individual’s current EGB, however, the marginal coefficients showed the correlations consistent with the theory. The model statistically significantly determined that the variables for number of homes purchased in a lifetime and price paid for a first home are inversely correlated with current EGB. In addition, income and education levels were statistically proven to be inversely correlated with current EGB.