Compound interest and your personal growth

by Jack on August 2010

First, an old fable:

Back in ancient times, a clever hero saved a kingdom from ruin. The king promised him anything he wanted in gratitude. The hero asked for something that seemed terribly humble.

“Your majesty, all I ask is that you bring a chessboard, and place one grain of rice on the first square today, two grains on the next square tomorrow, four grains on the next one on the next day, eight on the next on the following day, and so on, until you have done this for all the squares of the board”.

The king and his advisors laughed – was the hero really a fool instead? Didn’t he understand that he could become a wealthy, powerful man immediately, at the whim of the king?

“So be it”, the king said, shaking his head at the stupidity of a man they thought was so clever.

For a few weeks, the rice was brought in according to the agreed-upon scheme, and piled up in a remote room of the palace. The amounts grew bigger and bigger – by the fourth week, two horses were needed, their saddlebags filled to their limits with rice.

A junior clerk in the king’s treasury saw this and grew worried, and went off on his own to figure out how much rice would be needed. After calculating for a while, he ran to the king’s chambers and eventually persuaded the guards to let him in. The king agreed to listen for a single minute, shaking his head at the presumptuousness of this young subject.

“Speak quickly, young man!”, shouted the king. “What is so important that you need to see me immediately, when even my closest advisors wait their turn?”.

“Your majesty, I’ve calculated how much rice we need. You have agreed to give away thousands of times the value of the entire kingdom!

Such is the power of exponential growth, which can be seen in many different situations. One of the most familiar examples is compound interest on investments and debts. The percent rate of return is the most important standard in evaluating whether an investment is worthwhile. This is for good reason – the interest rate has a powerful influence on the value of the opportunity: an investment paying a reliable 6% per year doubles your money in 12 years, while an investment paying 12% doubles in only 6 years. Very high rates of exponential growth have caused the market value of companies like Microsoft and later Google to surge past other companies that had been around for decades longer.

We see exponential growth in action in other areas. In biology, we observe a tiny seed growing into a redwood tree hundreds of feet tall over decades. The same growth pattern happens in social trends and the spread of popular ideas – one person tells their friends, who tell their friends, and so forth.

Of course, in the physical, economic, and social worlds, there are ecological limits to this kind of rapid growth. Once “everyone” is your customer, there’s no more growth in your market. Once an animal reaches its full adult size, its growth levels off. Naive extrapolations sometimes show that a fast-growing company will be more valuable than the entire world in a few years. This makes no sense – obviously, the growth slows down at some point as the company reaches a dynamic equilibrium with its markets and with the rest of the world.

Exponential growth and self development

In this world you’re either growing or you’re dying, so get in motion and grow. (Lou Holtz)

Can you imagine how exponential growth might operate in area of your personal development? If you improve in one area by just 1 percent a week, every week, you will be over 70 percent better in that area by the end of the year. Conversely, if you decay in one area by just 1 percent a week, you will be over 40 percent worse by the end of the year. That means that if you started with a 100 pound maximum bench press, you would grow to be able to lift 170 pounds, or decay to be able to lift only 60 pounds.

This doesn’t just apply to physical areas, of course. Increasing the size of your social network connects you to exponentially more people with whom you can share value. Your knowledge of a subject can compound on itself as you develop a more holistic understanding, and you grow more able to remember small details because they fit into an organized “big picture” framework. Even areas such as emotional or spiritual development operate according to this model, although their “results” are not as easy to measure numerically.

It can be a very inspiring practice to observe and measure your personal development this way. After all, improving by 1 percent a week is going to feel extremely slow when you’re going through it day-to-day. But looking back after a year or two, you are likely to see that great changes and positive outcomes took place over time. Therefore, it’s important to remain motivated and recognize that the journey is almost never a fast and easy one.

Compounding habits

Sorry to say it, but everything you do counts in the game of life. It’s not one cigarette, or one act of avoidance, or one expression of anger, that kills you – it’s the reinforcement of that negative habit through “compound interest”.

If your negative habit becomes 1 percent stronger each week that you practice it, you dig yourself deeper and deeper into a hole the longer you let it progress. Quite honestly, practicing a bad habit “just this once” is not a big deal, and is unlikely to actually hurt you. The actual danger of “just this once” is that many negative habits operate according to the laws of exponential growth. When each instance of practicing the habit reinforces the habit, it often leads to another instance, and then another. Once the habit is locked in and stable, it becomes harder and harder to reverse the behavior.

For example, parents and mentors don’t teach children to avoid smoking because a single cigarette, or even an entire pack, can hurt them permanently – in fact, it probably won’t [1]. Instead, they teach them to avoid smoking because the first few cigarettes have the potential to lock in the habit very quickly, through the exponential growth effect. Once the habit is installed and stable, the real danger comes from the hundreds of thousands of cigarettes consumed by a habitual smoker over the next several decades of life.

This effect is also known as a positive feedback loop. It’s most commonly seen when someone holds a microphone too close to the loudspeaker – the sound level grows exponentially over a very short time, creating an loud and annoying ringing. The sound entering the microphone is amplified, comes out the speaker, enters the microphone again, comes out the speaker, and so forth, until it reaches the power limits of the amplifier.

Fortunately, there are positive habits that operate this way as well. You may have heard of “runners’ high”, in which athletes grow accustomed to the pleasurable endorphin release associated with working out. The feeling of relaxation associated with a yoga practice or a habit of meditation are other good feelings that a person can become “addicted” to. The challenge in installing positive habits that sustain mental and physical health is that their effects are often more subtle than the effects caused by drinking, drugs, overeating, or by powerful emotions such as anger. (In technical terms, their exponential growth rates are slower.)

Breakthroughs and plateaus

Of course, in the area of personal growth, things aren’t quite as simple as compound interest on a savings account. In some cases, our improvement will show an extremely rapid growth rate (“breakthrough”), and other times it will be extremely slow (“plateau”). We often see this pattern in athletic performance, for example.

In all forms of personal, professional, and interpersonal growth, patience and resilience are essential. While exponential growth is often a great analogy to use, the rates of change are almost never as stable as they are with a savings account. Real life is a lot more like an unpredictable startup company. We have periods of growth and decay, and the best thing we can do is to work to ensure that our long-term growth and improvement shows an overall positive trend. Short term ups and downs are inevitable.

The key is to figure out ways to remain motivated even during the plateaus and down periods, when you are still investing the time and effort but not experiencing the rapid growth that we realized during breakthrough periods. It’s easy to be motivated when you’re changing and growing rapidly, but it takes a lot of guts, character, and discipline to stick to a challenging practice when your rate of development slows down. You can see this in peoples’ professional activities – great numbers of people move into day trading during times of fast growth in stock markets, or become real estate agents when house prices are growing quickly. Many of these rapid converts are quick to leave during a downturn – they weren’t in the profession out of love, but only out of desire for a quick profit. Everyone has different reasons for pursuing their personal goals, so your reasons for staying motivated through tough times will be highly specific to you. Figure them out and hold on to them during the tough times.

The ultimate message is simple: we are never standing still – we’re either growing or decaying. Regular and persistent efforts enable us to leverage the power of exponential growth to make positive progress and reach our most important goals, even in the face of unpredictability.

[1] In fact, one time-tested method of punishment for a child caught smoking cigarettes is to make them finish the entire pack on the spot. After the coughing and vomiting subsides, the child will have associated extreme discomfort with act of smoking.

--


If you enjoyed reading this article...

1. Please get my premium personal development tips here, featuring special content not published on the blog.

2. Please follow the thirtytwothousanddays RSS feed here for up-to-date, practical, and inspiring resources that will put you on the fast track to personal growth and happiness.

3. Please follow me on Twitter here.

4. Please share this article with a friend, or anyone else you think could use a little extra peace and happiness today! 🙂 Share/Bookmark

Thank you!

{ 1 comment… read it below or add one }

Matthew A. Odonnell-Pollock May 16, 2013 at 11:15

I conceive other website proprietors should take this internet site as an example , very clean and great user genial design and style .

Reply

Cancel reply

Leave a Comment

Previous post:

Next post:

Share/Bookmark