Exponential Growth Bias and the Law: Why Do We Save Too Little, Borrow Too Much, and Fail to React on Time to Deadly Pandemics and Climate Change?
Many human decisions, ranging from the taking of loans with compound interest to fighting deadly pandemics, involve phenomena that entail exponential growth. Yet a wide and robust body of empirical studies demonstrates that people systematically underestimate exponential growth. This phenomenon, dubbed the exponential growth bias (“EGB”), has been documented in numerous contexts and across different populations, using both experimental and observational methods.
Despite its centrality to human decisionmaking, legal scholarship has thus far failed to account for the EGB. This Article presents the first comprehensive study of the EGB and the law. Incorporating the EGB into legal analysis sheds a new light on a long list of policy debates and highlights new solutions to many problems that the legal scholarship has been grappling with. More concretely, in the sphere of policymaking, the EGB explains the systematically delayed legal response to novel exponential risks such as the COVID-19 pandemic and climate change. Building on this insight, this Article highlights new legal strategies that could improve officials’ ability to react promptly and effectively to such threats. In the sphere of individual decisionmaking, this Article shows that the EGB causes people to systematically err when making decisions that involve exponential phenomena. Consequently, people often borrow too much, save too little, and fall prey to sophisticated marketing tactics. In light of these findings, this Article presents a novel regulatory framework, which includes new disclosure duties that could assist people to grasp the long-term implications of their choices, and the imposition of mandatory rules that would minimize the exploitation of the EGB by savvy profit-maximizing entrepreneurs.
Doron Teichman & Eyal Zamir