How thinking slow could make you fast profits on your investments

The name of this e-letter is Exponential Investor. It was created to report on the exponential trends in tech that will change the world… and make early investors a lot of money.

But the idea of exponential growth is tricky. By its nature it sneaks up on you.

One day everything seems normal, the next an industry is forever changed. Only, that change didn’t really happen overnight. It took years, sometimes decades to get moving.

But the fact it was moving at an exponential rate is what made it seem like it all happened overnight.

We are seeing this exponential growth happen in three specific areas right now. This growth has been happening behind the scenes for more than a decade. But because this growth is exponential, when it crosses a certain threshold, it’s going to take most people by surprise.

So today, I want to briefly talk about the nature of exponential growth, with the help of Nobel Prize-winning psychologist Daniel Kahneman, and then show you what these three key areas are.

The nature of exponential growth

In the 1970s, two very different people struck up an unlikely friendship after an explosive argument in a lecture hall.

Those two people were Israeli psychologists Daniel Kahneman and Amos Tversky. Their work on the psychology of decision making would go on to form the basis of behavioural economics and win Kahneman a Nobel Prize.

Tversky would have no doubt been awarded the prize too, had he still been alive at the time in 2002. In fact, I believe Kahneman said as much in his acceptance speech.

If you want to know more about their work, and why people think in the way they do, I can highly recommend the book The Undoing Project by Michael Lewis.

But back to today’s essay. The reason I bring this duo up is because their work on “fast and slow” thinking explains why most people are thrown by exponential growth.

And to show you why, here’s a question for you to answer in your head:

In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how many days would it take for the patch to cover half of the lake?

Got the answer? Good. Let’s see if you were right.

The correct answer is 47 days.

Most people who answer that question say 24 days. But that’s not how exponential growth works.

To explain why, here’s an excerpt from Big Think:

This trick here is that the lily pads grow at an exponential rate, not an arithmetic rate. On the day before the 48th day, the pond was only half-covered in lily pads; the day before that, one-quarter covered; the day before that, one-eighth covered; the day before that, one-sixteenth covered. Go back two weeks from the 48th day (day 34) and you will be hard-pressed to find any lily pads on the lake. It will be only 1/16,384 covered on that day. This means only .006% of the surface will be covered by a lily pad patch. Imagine how powerful a microscope you’d need to detect any lily paddage at all on day 1.

This was one of the questions Kahneman and Tversky used to show how cognitive biases work, or as Kahneman would put it in his later work, the difference between “thinking fast and slow”.

That lily pad question isn’t hard. But our brains tend to jump to the wrong conclusion because they are trying to solve it too fast. In these situations our brains tend to rely on shortcuts known as heuristics.

And getting the wrong answers on these kinds of questions doesn’t mean you’re less intelligent. In fact, later research has shown that more intelligent people are more likely to get these kinds of questions wrong.

Being highly educated doesn’t help either. For example, the following question fooled more than 50% of students at Harvard, Princeton, and MIT.

A bat and a ball cost £1.10 in total. The bat costs £1.00 more than the ball. How much does the ball cost?

Got your answer ready?

The correct answer is 5p. Not 10p as most people assume.

If the ball cost 10p and the bat cost £1 more than it, then the bat would cost £1.10. So both together would cost £1.20.

Exponential growth in the energy sector

So, how does this all relate to those three specific areas I was talking about in my opening?

Those three areas are:

  • Growth in renewable energy
  • Growth in the electric car market
  • Growth in the technologies that allow both of these things to flourish.

In tomorrow’s Exponential Investor, I’ll show you what this growth is, why it’s happening, and which specific investment areas it is going to set alight.

And I should hopefully be able to share Eoin Treacy’s latest research into these sectors with you, too.

Just as with that lily pond question, this growth is going to take many people by surprise. But not you.

Until then,

Harry Hamburg
Editor, Exponential Investor

Category: Commodities

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