Intuition and exponential growth: bias and the roles of parameterization and complexity.

Abstract

Exponential growth bias is the phenomenon that humans intuitively underestimate exponential growth. This article reports on an experiment where treatments differ in the parameterization of growth: Exponential growth is communicated to one group in terms of growth rates, and in terms of doubling times to the other. Exponential growth bias is much smaller when doubling times are employed. Considering that in many applications, individuals face a choice between different growth rates, rather than between exponential growth and zero growth, we ask a question where growth is reduced from high to low. Subjects vastly underestimate the effect of this reduction, though less so in the parameterization using doubling times. The answers to this question are more severely biased than one would expect from the answers to the exponential growth questions. These biases emerge despite the sample being highly educated and exhibiting awareness of exponential growth bias. Implications for teaching, the usefulness of heuristics, and policy are discussed.