Exponential growth

Friday, Mar 6th 2020

Commentary

The recent spread of coronavirus has got us thinking about one of biggest yet most basic shortcomings in humankind's ability to think: appreciating exponential trends.

In other words, human beings have proven time and time again to be shockingly poor at understanding the power and extent of exponential growth trajectories.

That in itself may strike you as a bit of a surprise. You'd think anyone who took basic algebra should have a decent understanding of what an exponential curve looks like.

But truly appreciating that and having that baked into one's gut instincts / internal forecasting mechanism is extremely rare - even for intelligent and experienced investors who you'd think would understand that and should have incredible financial incentive to do so.

To illustrate this, ask your friends what they would do if they won the lottery and could choose to accept the payout in the format of either $1 million today, or 1 cent in a savings account that doubles every day for a month.

Savvy riddlers may default to the less intuitive option, but most people's gut instincts (and many people's actual answers) would be drawn straight to the $1 million.

Of course, that would be the more foolish option by a long shot - to the tune of about ~$10 million (or 10x the total payout!)

But what's most interesting about this is that even at week 4, the people who took the $1 million offer wouldn't realize that. In fact, at week 4, the penny-takers would have barely over $10,000 - just 1% of the wealth the people who took the $1 million would have had.

The rest of that 99% gap, plus the additional ~$10 million on top of that, would have all come in the last 10 days.

This is a timeless example of the magnitude and velocity of the impact that exponential growth can exact on trailing / historic trends.

We couldn't help but think of this as we witnessed the steady flow of coronavirus hot takes trickle out over the past 2 months:

"It's only in China" ....which became....

"There's only like 30 cases outside of all of China" ....which became...

"There's only like 30 cases in all of California" ...which became....

"Even if you grow the reported case count by 10x, that's still only 0.00001% of the population"

🤦‍♂️

Hopefully, by now you have a better gut sense for how just rapidly even a few nodes of successive 10x increases can alter a trajectory. 

As investors, having this ability is surprisingly rare, yet critical - not because it's necessary 90% of the time, but because the 10% of the time it is relevant, it can completely change your realized outcome.

Coronavirus Progression Click here for animated GIF of the above(Coronavirus progression, day 4 to day 42)

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