I've been thinking about the concept of Compounding - how everyone knows about the inherent benefits it provides and yet is so hard to practice. Compounding, as a concept is very hard to grasp, especially because its counter-intuitive. If someone told you to invest just $5 everyday, with an annual return on that investment of 10%, that you'd become a millionaire by the age of 31, you'd probably kick them out and forget about it the next day. Why? Because human minds can comprehend linearity much better than exponentialitiy. Now, imagine you save $5 a day every day from the moment you're born. That would amount to $1825 a year. To become a millionaire, it'd take you about 548 years. The striking contrast between 31 years and 548 years!
You can see this everywhere. It's easy to think about what 8+8+8+8+8+8+8+8+8+8 evaluates to (it's 80). But if I ask you to calculate 8*8*8*8*8*8*8*8*8*8, you'll likely bang your head. We plan our lives linearly, high school -> college -> job -> marriage -> retirement -> death. I'm not sure what lead to this thinking, but I'm assuming since our current human mind is a culmination of decades of survival-ship, grasping exponentiality wasn't exactly on the to-do list. As a result, everything we think about - viz-a-viz - the decisions we take, are based on linearity.
This is probably why its so hard to commit to habits - personal, professional, physical, financial - that could hugely compound over time and give exponential returns. But since we think about it linearly, we expect the benefits to be linear too. Six days in the Gym should mean six packs. But it rarely works that way - an exponential graph lags behind a linear one in the nascent phases, but greatly overhauls the latter, given a long enough time horizon.
Benefits of compounding are huge. Everyone understands that. Warren Buffet is universally considered one of the greatest investing minds of this generation. His estimated net worth was around a staggering $84.5 billion in 2020. But, $81.5 billion of $84.5 billion came after his 65th birthday. Our minds are not built to understand such absurdities. He described it as a snowball rolling down a hill. By the time it reaches the bottom, it is much larger. This is provided you have a long enough hill. Everyone believes in compounding, but to take decisions based on it, is an entirely different matter.
I'm adding an addendum to this post after a month. I discovered more information as I read books about why human brain behaves in this fashion. Let's start off with the concept of gratification — the titillating feeling one feels when getting something desired. Gratification comes in two types — instant and delayed. People reading this might already have heard about the concept of instant gratification, but this is an attempt to tie why instant gratification matters and how it impacts compounding.
The latest human species — the homo sapiens sapiens have been around for thousands of years. They lived very much in the present. Their instant worry at any given point of time was to find food for their themselves and their family, and not die. Hunting for food, providing shelter, mating to continue their lineage were all forms of instant gratification for them. The benefits of their decisions were instant — hunting meant not going to bed hungry, building shelter meant staying safe from danger, mating meant preserving their bloodline, and so on. This has been the case for thousands of years. As a result, brains have adapted to this pattern, and evolved to seek instant pleasures as a means to survive.
However, the modern world is nothing alike. Humans nowadays are burdened with building careers, planning for retirement, financial planning, savings, investing, and to go even further, entrepreneurship, influencing, building a social brand, distribution, and much more. To give you some context, none of these 'areas' existed more than 500 years ago. It is only recently that we've shifted to more long-term planning and execution and abandoned the primal day-to-day way of living. All of these areas require taking actions now that do not have any immediate effects, but their results become very evident long-term. Working hard everyday for a year might not change anything, however, do that for 10 years and you can change the world. Save money now instead of eating out, and you can retire with enough money in the bank to live a satisfied life.
This sounds quite doable in practice, and still we default to gratifying behavior when the moment of decision arrives. Everyone knows smoking cigarettes is bad for health, and can possibly lead you to death in 10-20 years, but it provides relief from stress "now". Eating junk can make you obese in your adult life, but emptying a packet of chips provides satisfaction and amazing taste "now".
If one notices clearly, all of these aspects requires taking actions that have delayed results. And yet, it is hard. The reason: we're still performing on outdated hardware that hasn't been updated for thousands of years, in a very modern 500-year-old world. The world around has changed very recently from rewarding actions instantly to rewarding them over a delayed time period. This shift hasn't yet reflected in the anatomy of human brains, and might not be, for very long. Evolution is a very slow process, and we only have about 500 years of data points to account for.
Bringing it back to the whole conversation about linearity and exponentiality from before, one might guess why difficulty in grasping the exponential nature of compounding decisions is so evident. In the ancient era, each decision had a definite outcome. Hunt an animal and you're sorted for one night. Hunt two, and you're sorted for two. The brain hasn't yet evolved to change this behavior.
Which is why, going to gym for a week and seeing no (visible) improvement is understandably frustrating. It has no linear benefits, but it does compound over time, which is not evident at first glance.
This was a very fascinating piece to explore. I'm sure multiple researches have been carried out to explore these concepts in depth, however, I have not got around to exploring any of them yet. I guess we just wait for our brains to evolve — shouldn't be a very long wait! :)