Compounding

How small growth creates explosive results

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TL;DR

Small things will inevitable become huge over time if they grow at an exponential rate.

Compounding is a mathematically simple, yet powerful concept that impacts many areas of our lives, from finances and investment, to education, learning, biology and relationships.

In its simplest form, a compound growth processes describes a scenario in which the absolute amount of growth isn't fixed but depends on how much is there already — the more there is, the higher the absolute growth.

This leads the phenomenon that even if something is rather small in the beginning and only grows by very little regularly, it will become extremely big in a foreseeable time. Exponential growth is what we observe if compounding is at play.

Compounding and exponential growth underpin many phenomena we observe in reality:

  • the rapid global spread of viruses that leads to pandemics,

  • the returns that turn small investments into fortunes over time,

  • the spreading that turns small fires into catastrophes,

  • the virality that produces social media hits,

  • the word-of-mouth that generates millions of users for new apps over night,

  • the rapid population growth that leads to billions of more people in a few years,

  • the extreme improvement of computing power that leads to smartphones and artificial intelligence.

There are less straightforward and less calculable examples where compounding can lead to extremely strong gains over time:

  • an increasing learning curve over time as we use our added knowledge to add even more knowledge,

  • an ever stronger widening of our social networks as each new contact potentially connects us to more people,

  • a continuous deepening of social relationships as newly gained trust and understanding leads to ever deeper layers of connection.

Exponential growth is a poorly understood concept as humans have an innate bias to think in linear models.

Understanding the basics of compounding and exponential growth is a fundamental skill to comprehend change in our modern world.


To Remember

“The greatest shortcoming of the human race is our inability to understand the exponential function.”

— Albert Allen Bartlett

“The extinction of the human race will come from its inability to emotionally comprehend the exponential function.”

— Edward Teller

“Small, Smart Choices + Consistency + Time = Radical Difference”

— Darren Hardy


Explore

➞ For a deep dive into the basics of exponential growth and how it relates to biology, physics, finance and the internet, read this Wikipedia article.

This article introduces you to compound interest as the basis of compound growth in finance and investment..

This video gives you a few intuitive examples of how powerful compound growth truly is.

➞ Watch this clip from the Lex Fridman podcast to understand how exponential dynamics govern more and more of our world.


Resources

For a structured list of fascinating booksblogspodcasts, and Youtube channels related to growth, systems thinking and decision making, visit mindvault.co/vault/compounding.


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