Americans don’t save nearly enough money. And a new paper, titled “How Biases Affect Retirement Saving”, offers a theory as to why that is. The focus is on two common biases – the “present bias” and the “exponential growth bias”.
The present bias states that for most people, we will sacrifice some future benefit for a more immediate one, even if that immediate one is lesser. Asked whether they preferred $100 today or $120 in one year, most people take the $100 today.
The exponential growth bias is simply a misunderstanding of how compound interest helps savers. Something that grows at 2% each year for 20 years will have increased by more than 50%. Click here to read more.