IFREE/ESI Lecture Series Presents: Joshua Tassoff, Ph.D. “Exponential-Growth Bias and Lifecycle Consumption.”

Oct. 5th, Joshua Tasoff, Ph.D. – Exponential-Growth Bias and Lifecycle Consumption.

Abstract: Exponential-growth bias (EGB) is the tendency for individuals to underestimate exponential growth to the neglect of the role of compounding. We develop a theoretical model in which EGB causes consumers to mis-perceive the budget constraint. Because consumers dynamically mis-perceive prices, consumers will over-consume early in their lifecycle if the elasticity of intertemporal substitution is sufficiently large. This over-consumption is exacerbated when income is received later in the lifecycle, as biased agents will additionally mis-perceive the present value of their earnings. These effects can lead to over-indebtedness both for early consumption and for over-investment in human capital. Finally, we show that EGB leads to a form of dynamic inconsistency in which planned future consumption increases when the agent’s asset balance is positive and decreases when the balance is negative. This inconsistency can lead to significant welfare losses if the consumers are able to commit lower bounds on future consumption, such as consumption commitments in housing – commitment which other forms of dynamic inconsistency, such as present-biased preferences, would predict to be welfare-enhancing.

Bio: Josh Tasoff received his bachelor’s degree in economics from MIT in 2003.  In 2010, he graduated from UC Berkeley with a Ph.D. in economics.  His research applies insights from psychology to economic environments and he does both theory and experiments.

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