On Exponential Growth Bias

Experimental evidence demonstrates a human tendency to extrapolate linearly from exponential data. A large literature labels this tendency ‘exponential growth bias.’ This article demonstrates that financial concepts are expressible as linear functions containing exponential terms, and therefore it is not necessarily biased to have a linear intuition about exponential data. Conventional understanding of the term ‘interest rate’ is too narrow: nth order polynomials in x have n solutions for x, and therefore nth order time-value-of-money equations solve for n interest rates; conventional finance focuses on one rate and ignores the others. This myopia leads to the perception of bias