Compounding - The worlds greatest wonder!

Einstein called Compounding the Eighth wonder!

Though I am nobody to dispute Einstein’s judgement, I cannot reason any argument for him to call compounding the eighth wonder. In my mind, none of the 7 wonders can match the scale and range of Compounding.

Compounding is the greatest wonder!

I do not think most human beings understand the magnanimity of this whole phenomenon because the human brain is trained to think in a linear way and not exponentially. Before I talk about the reasons for this fallacy of the human brain, Let me tell you a short story that gives you an Eureka moment!!

Once upon a time, there was a kingdom ruled by a king who had a lot of wealth. In fact, his kingdom was the largest producer of Rice in the world. One day, the king was introduced to the game of Chess. The king was very impressed with the design of the game. Therefore, he wanted to meet the inventor.

The inventor who was also a mathematician came to meet the king. After talking to the inventor, the king acknowledged the genius of the man and asked him to make a wish.

The mathematician offered that he will make a proposition with the chessboard and suggested that as soon as he explains the deal, the king can either agree or decline the deal in the next 10 seconds. However, if agreed the king should fulfil the deal no matter what! The King agreed to the idea!

Now imagine yourself in the place of that king with the most wealth in the world and decide in 10 seconds after reading the next paragraph if you would agree or not. Remember just 10 seconds!

The mathematician takes the chessboard and places one grain of rice in the first square. Then two grains on the second square, four grains on the third, and so on. Doubling in every next square. Now, he asks the king to accumulate grains of rice doubling in every next square in the same order until all the boxes in the chessboard are finished. He wishes to take all these grains of rice back with him and says that’s all he wants!

Now in the next 10 seconds, make a decision if you agree to the deal or not! Also, make a guess of how many bags of rice that accumulation would make up!

Move to the next paragraph only if you have imagined the quantity of rice ( Either in the form of rice pile or rice sacks)!

The king was nonchalant and laughed at the mathematician in an insulting tone. He agreed to give that amount of rice that accumulates on the chessboard and ordered his treasury to make the chessboard exercise and handover the rice to the mathematician. He also advised the mathematician to make better, wiser propositions in the future. He walked out to perform his other priorities.

Now let us do the math to understand the deal by making a comparison to a real case scenario.

The chessboard has 8x8 = 64 squares in total.

So, logically doubling the grains in every 64 squares = 2^64 = 18446744073709600000 grains.

I just googled to find that china is the largest producer of Rice at 150 Million Tons/year and followed by India at 116 MT/year followed by Indonesia at 37MT/year.

At today’s rate of rice production China would require 3566 years, the whole world will need 1188 years to produce as much grains to give to the mathematecian!

Can you believe that??

The calculation is below if you are interested in the math.

If it is not shocking, you did not understand or you are too wise, it will make no sense for you to read further!

One of the reason our brain underestimates compounding is maybe because human brain always thinks in a linear fashion. Think about our daily routines.

Wake up -> Brush -> Eat -> work -> Eat -> Work ->Relax -> Eat-> Sleep.

Think about our Life

Study till 22 --> Start work @23 --> Marry @28 --> Take Loan and Buy House @ 30 --> Work rest of life repaying the loan--> Retire@ 60.

How many of us think alternate options ? What about second & Third order thinking? How many of us buy something (expensive Car/Phone) and realize later it was not worth the money?

Why should one buy a house when one is not entirely sure if he/she will live in the same city for rest of the life? Our mind is so short-sighted.

Do we at least think What if....? What happens if this plan fails? What route should I take? What next?

Unfortunately, our brain is not wired to think that way. But, many accomplished thinkers of the world have proved that its not impossible.

In fact, I remember discussing with a friend in class 10 that 1Lakh salary/month should be enough to lead a lifestyle that is uncompromising and luxurious. Today, its far from reality.

10 years down, it will be obscure.

We think, If it took you five years to get here, it’ll take you another five years to get there. We look to the past to predict future possibilities. But the world is evolving faster than we think it is.

Its important to remember that the human mind is flat. It lacks depth to perceive exponentiation. We do not realize the snowballing affect small things can have. Some examples.

If you double your wisdom every 3 years, In 30 years, you will 1000 times wiser than today.

If you take 1 meter steps, 30 linear steps will take you 30 meters. If you take 30 steps exponentially, you will take 26 trips around the world.

If you invest Rs.25000 every month in a FD yielding 10% interest and increase investment by 10% every year for the next 50 years. You will be a Billionaire.

These are tangible examples of compounding. But even more worthwhile are the intangible effects of compounding like Good-will, Love, Knowledge and Passion that are incredible and cannot be explained in numbers.

Enjoy Compounding!