Misunderstanding Savings Growth: Implications for Retirement Savings Behavior

People systematically underestimate exponential growth. This article illustrates this phenomenon, its implications, and some potential interventions in the context of saving for retirement, where savings grow exponentially over long periods of time. Experiment 1 shows that a majority of participants...

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Bibliographic Details
Published in:Journal of marketing research 2011-01, Vol.48 (SPL), p.S1-S13
Main Authors: MCKENZIE, CRAIG R.M., LIERSCH, MICHAEL J.
Format: Article
Language:English
Subjects:
Calculators
Compound interest
Consumer behavior
Cost savings
Geometric growth
Interest rates
Marketing
Retirement
Retirement savings
Savings
Studies
Underestimates
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Summary:People systematically underestimate exponential growth. This article illustrates this phenomenon, its implications, and some potential interventions in the context of saving for retirement, where savings grow exponentially over long periods of time. Experiment 1 shows that a majority of participants expect savings over 40 years to grow linearly rather than exponentially, leading them to grossly underestimate their account balance at retirement. Experiment 2 demonstrates that this misunderstanding leads to underestimates of the cost of waiting to save, which makes putting off saving more attractive than it should be. Finally, Experiments 3—5 show that highlighting the exponential growth of savings motivates both college students and employees to save more for retirement. Making clear to employees the exponential growth of savings before they make crucial decisions about how much to save may be a simple and effective means of increasing retirement savings.
ISSN:0022-2437
1547-7193
DOI:10.1509/jmkr.48.SPL.S1