The Miracle of Compound Interest

Does our Intuition Fail?

J. Binswanger, K.G. Carman

Research output: Working paperDiscussion paperOther research output

230 Downloads (Pure)

Abstract

When it comes to estimating the benefits of long-term savings, many people rely on their intuition. Focusing on the domain of retirement savings, we use a randomized experiment to explore people’s intuition about how money accumulates over time. We ask half of our sample to estimate future consumption given savings (the forward perspective). The other half of the sample is asked to estimate savings given future consumption (the backward perspective). From an economic point of view, both subsamples are asked identical questions. However, we discover a large “direction bias”: the perceived benefits of long-term savings are substantially higher when individuals adopt a backward perspective. Our findings have important impli- cations for economic modeling, in general, and for structuring advice and financial literacy programs, in particular.
Original languageEnglish
Place of PublicationTilburg
PublisherDepartment of Economics
Number of pages45
Volume2010-137
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-137

Fingerprint

Intuition
Savings
Retirement saving
Randomized experiments
Perceived benefits
Economic modelling
Economics
Financial literacy

Keywords

  • Behavioral economics
  • financial intuition
  • financial literacy
  • com- pound interest
  • retirement saving

Cite this

Binswanger, J., & Carman, K. G. (2010). The Miracle of Compound Interest: Does our Intuition Fail? (CentER Discussion Paper; Vol. 2010-137). Tilburg: Department of Economics.
Binswanger, J. ; Carman, K.G. / The Miracle of Compound Interest : Does our Intuition Fail?. Tilburg : Department of Economics, 2010. (CentER Discussion Paper).
@techreport{c6f1bbecbee0467b956c1fc1cc50ca7d,
title = "The Miracle of Compound Interest: Does our Intuition Fail?",
abstract = "When it comes to estimating the benefits of long-term savings, many people rely on their intuition. Focusing on the domain of retirement savings, we use a randomized experiment to explore people’s intuition about how money accumulates over time. We ask half of our sample to estimate future consumption given savings (the forward perspective). The other half of the sample is asked to estimate savings given future consumption (the backward perspective). From an economic point of view, both subsamples are asked identical questions. However, we discover a large “direction bias”: the perceived benefits of long-term savings are substantially higher when individuals adopt a backward perspective. Our findings have important impli- cations for economic modeling, in general, and for structuring advice and financial literacy programs, in particular.",
keywords = "Behavioral economics, financial intuition, financial literacy, com- pound interest, retirement saving",
author = "J. Binswanger and K.G. Carman",
note = "Pagination: 45",
year = "2010",
language = "English",
volume = "2010-137",
series = "CentER Discussion Paper",
publisher = "Department of Economics",
type = "WorkingPaper",
institution = "Department of Economics",

}

Binswanger, J & Carman, KG 2010 'The Miracle of Compound Interest: Does our Intuition Fail?' CentER Discussion Paper, vol. 2010-137, Department of Economics, Tilburg.

The Miracle of Compound Interest : Does our Intuition Fail? / Binswanger, J.; Carman, K.G.

Tilburg : Department of Economics, 2010. (CentER Discussion Paper; Vol. 2010-137).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - The Miracle of Compound Interest

T2 - Does our Intuition Fail?

AU - Binswanger, J.

AU - Carman, K.G.

N1 - Pagination: 45

PY - 2010

Y1 - 2010

N2 - When it comes to estimating the benefits of long-term savings, many people rely on their intuition. Focusing on the domain of retirement savings, we use a randomized experiment to explore people’s intuition about how money accumulates over time. We ask half of our sample to estimate future consumption given savings (the forward perspective). The other half of the sample is asked to estimate savings given future consumption (the backward perspective). From an economic point of view, both subsamples are asked identical questions. However, we discover a large “direction bias”: the perceived benefits of long-term savings are substantially higher when individuals adopt a backward perspective. Our findings have important impli- cations for economic modeling, in general, and for structuring advice and financial literacy programs, in particular.

AB - When it comes to estimating the benefits of long-term savings, many people rely on their intuition. Focusing on the domain of retirement savings, we use a randomized experiment to explore people’s intuition about how money accumulates over time. We ask half of our sample to estimate future consumption given savings (the forward perspective). The other half of the sample is asked to estimate savings given future consumption (the backward perspective). From an economic point of view, both subsamples are asked identical questions. However, we discover a large “direction bias”: the perceived benefits of long-term savings are substantially higher when individuals adopt a backward perspective. Our findings have important impli- cations for economic modeling, in general, and for structuring advice and financial literacy programs, in particular.

KW - Behavioral economics

KW - financial intuition

KW - financial literacy

KW - com- pound interest

KW - retirement saving

M3 - Discussion paper

VL - 2010-137

T3 - CentER Discussion Paper

BT - The Miracle of Compound Interest

PB - Department of Economics

CY - Tilburg

ER -

Binswanger J, Carman KG. The Miracle of Compound Interest: Does our Intuition Fail? Tilburg: Department of Economics. 2010. (CentER Discussion Paper).