The Effects of Compounding

The physicist, Albert Allen Bartlett, once said, “The greatest shortcoming of the human race is our inability to understand the exponential function.” I thought this only mattered in matters related to finance, where the effects of compounding over time makes a large difference. One man who does get the effects of compounding is the investor Warren Buffett. That’s probably why his authorized biography is titled Snowball.

But, as Shane Parrish writes, the effect of compounding matters in other areas too. And people have been saying this for decades! Like Roy Amara:

“Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.”

Or take the famous Moore’s law that predicted that the number of semiconductors on a chip would double every 2 years or so:

“Sure, it’s not that hard to imagine your laptop getting twice as fast in a year, for instance. Where it gets tricky is when we try to imagine what that means on a longer timescale. What does that mean for your laptop in 10 years? There is a reason your iPhone has more processing power than the first space shuttle.”

Or that tale of the inventor of chess who asked for 1 grain of rice on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on. How much do you think is needed for all 64 squares on the chess board? If you don’t know the answer already, it’s stunning to be told that all the land on the planet used to grow only rice for one crop cycle would still not be enough.

It happens in technology too. Just 20 years ago, the Internet was a novelty, something only some people got onto. Today, pretty much everyone uses the Net, indeed needs it to get deliveries, find their way around and to book cabs. A little over a decade back, an all-purpose in your pocket was a dream; today, almost everyone has a smartphone. The speed at which technological changes impact the world has only been accelerating over time. Or as Ray Kurzweil wrote:

“We won’t experience 100 years of progress in the 21st century—it will be more like 20,000 years of progress (at today’s rate).”