Mental Shortcuts - Exponential Growth

Exponential Growth

Have you ever heard of the exponential growth bias? It’s a phenomenon that arises when we have trouble comprehending the power of exponential growth, which can be difficult to grasp because it’s not something that our ancestors had to deal with on a regular basis.

One classic example of exponential growth is folding a piece of paper in half, and then in half again, and continuing to do so for 50 folds. If you guessed that the paper would be a few inches thick after 50 folds, you’d be way off. In fact, the paper would be so thick that it could nearly reach the sun from Earth! That’s the power of exponential growth, and it can be hard to wrap our heads around.

To illustrate this point further, let’s look at some hypothetical examples of growth in a country. If the inflation rate is 5%, we might not really understand what that means. But if someone told us that in 14 years, our money would be worth half what it is today, we’d start to worry. That’s because we can understand the power of exponential growth when it’s put into terms that we can relate to.

One of the most powerful forces in the universe is the power of compounding, as Albert Einstein once said. To see this in action, imagine placing one grain of rice on the first square of a chessboard, two grains on the second square, four grains on the third square, and so on, doubling the number of grains on each subsequent square. By the time you reach the end of the board, you’d need 18 quintillion grains of rice, which is a number that’s so large it’s almost incomprehensible.

To get a better handle on exponential growth, we can use the rule of 70. If an investment returns 10%, our money will be worth double that in approximately 7 years. If inflation is 8%, our money will be worth half what it is today in approximately 8.7 years. And if a country has 5% population growth, the population will double in approximately 14 years.

Of course, these growth rates would need to remain constant, and the world is full of uncertainties and complexities. But using the rule of 70 can help us understand exponential growth in more intuitive terms.

So if you want to avoid falling victim to the exponential growth bias, be careful with your intuition about exponential growth. It’s not something that comes naturally to us, so it’s important to try and convert growth rates into something linear with a time frame wherever possible.

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