Sunday, November 08, 2015

Compound effect of our choices

Compound interest doesn't only work on money. It works on everything that we choose to do, which includes all the good choices and the bad choices.

Compounding works on this equation:

Taken from WikiHow link here.

Not all the decisions that we make have the same interest rate. Some decisions are trivial and these compound at a lower interest rate. Yet other decisions are heavier, incurring a much heftier interest rate. If you have to make a decision on whether to drink coke or pepsi, these are unlikely to incur a heavy interest rate. If your peers egg you on to smoke, and you are at the crossroad where you are choosing between smoking or not smoking, these are - surprise surprise - also unlikely to incur a high interest rate. Smoking one cigarette for one day probably wouldn't affect your health significantly. But if you are to decide whether to commit to a serious crime, or to murder someone, I think these are the decisions that may make or break you.

If you think about it, there's not a lot of decisions that incur such a heavy interest rate. Not even if you decide to play and not study for your exams. Well, though they are moderately high in interest rates (your views might be different from mine, of course), they are not likely to be such a great decision that will make or break you. In fact, the older I get, the more I realised that most things are life can be reversed and remedied, but you might not know it when you go through them. On the benefit of hindsight (and age and wisdom), you might be able to pierce through the fog of war and see an event that happened to you in its proper light.

But we haven't talked about the time factor. We know that in investments, even if the investment returns are low, given enough time on our side, it'll snowball and increase exponentially. I think the same can be said for our decisions. If you smoke 10 cigarettes a day for 1 week, it'll not likely to result in any serious harm to your body. But if you are to smoke 10 cigarettes a day for the next 10 years, I think the compounding effect of a low interest rate decision can snowball to seriously harm your body. The same can be said for good decisions too. Doing just 10 pull ups a day for 1 week isn't going to improve your health much, but if you persevere and consistently do 10 pull ups a day for the next 10 months, you're likely going to see see real health and physical improvements.

The last factor is actually the frequency of compounding. When applied to real life, it refers to how often you repeat your decisions. Smoking 10 cigarettes a week for 10 yrs is likely to be vastly different from smoking 10 cigarettes a month for 10 yrs, because the period of compounding is different, even if we are talking about the same decision and hence the same interest rate and the same time period. If you read 1 book a week over 5 years, it's also likely to be different from reading 1 book a month over 5 yrs. The benefits of a good decision compounds its interest rate over the frequency of compounding over the time period. The same goes for bad decisions.

Do not underestimate the power of small positive steps taken over a long period of time compounded over a high frequency of compounding. It's like how we can underestimating the amount we get if we just invest $100 per month over 30 years at 2.5% pa compounded yearly. You'll get an incredible $54,000 at the end of 30 yrs!

While we do not know the numerical values of the interest rate, frequency of compounding and the time period of our decisions, it's still possible to guesstimate and control the variables. If you're having a good habit, make it more frequent and sustain it over a long period of time no matter how minuscule that gain is initially. One day, when a certain critical mass of good decision accumulated is reached, you'll find that you'll end up miles ahead from where you began. On the other hand, if you know you have a bad habit, reduce the frequency of the habit compounding, then shorten the time period until eventually you kick it off. If not, when you accumulate a critical mass of past bad decisions, you might really be too late to reverse the situation.

I think one of the most important decision I've made to improve myself is to read. I started the habit in 2007 and the target is always to read one book a week. Over the course of 9 yrs, trying to read a book a week, I read and re-read 353 books to date. These are not all unique titles, and a percentage of them are re-reads. Some books I try to read again every few years because those are just like meeting an old friend over kaya toast and kopi. My language improved a lot, I blog better, I think clearer, I synthesize and play around more creatively. These are improvements that are not made in one year or two years or three years. It's about doing the same thing over and over again, over a long time and gaining that minuscule advantage each time until it compounds to a sizable return.

What good habits have you compounded over the long term? Are you a long term compounder of your choices?


Sillyinvestor said...

Hi LP,

Hmm... I did notice u read extensively. When u asked what good habits do I do frequently no matter how insignificant, I can't really think of any... Sigh... But had habits I can think of a handful.

What a mathematical way to explain an otherwise "philophiscal concept"

One habit is perhaps I also think a lot ... But there is hardly a theme, it could be work, life or whatever. But does that count? Think that is common like breathing ...

la papillion said...

Hi SI,

Thinking is not as common these days :) Good habits!!

Well, if you don't have good habits, at least don't have that many bad ones hahaha

aloypro said...

Hi LP,
I love how you brought compounding to another context! I too believe not just in the compounding of wealth, but also of knowledge! Ever since I bought my Kindle, I have began reading like never before. But then again, I never really read anything except my literature textbook..

The 1 year of growth I experienced through reading is tremendous and I'm an avid reader now! I used to be those who would think that "I could never finish a book because I'll fall asleep", but I realised that it was all about finding the genre that interests you.

Thank you for such as a well-curated post, it's time for me to reflect on what are the things that I'm doing that are compounding in a good/bad way. Work harder on the good and nip the bad habits in the bud!

la papillion said...

Hi Aloypro,

Hey hey thanks! I'm quite surprised that this article is so well received. I thought this is one of those posts that nobody will be interested in lol

I know how you feel when you got the kindle! Sometimes reading a good book will give me such a high that I'll want to rush home to read the next chapters and the next :) I have another problem because of this reading habit though, which is knowing what to read next!

Hope to see you blog about your reflections :)

Rolf Suey said...

Hi LP,

The rate u r reading is almost mission impossible! haha

Just like u, my best ever habit is to pick up reading and writing (outside work) more than two yrs ago. Not yet compound for long. Another one good habit is to quit smoking after almost 20 yrs for more than 2 yrs now. Before that, I was just working n working, smoking n smoking! Even reading also all related to oil n gas n work.

My best compound habit is that I had been going to Gym for almost the last 18 yrs now! Also I was in the same field and same industry since graduation. But the best ever compounding habit I has is the openness to try new things and willingness to keep trying, failing and learning. I think this compound the most for my entire life in a positive way! Not sure this is a habit or trait!


la papillion said...

Hi Rolf,

Wow, didn't know you're a smoker, haha :) Oil man plus smoke = very bad health, so I'm glad you kicked off that habit! I've been doing home gym for past 4 months too. Every day of the week, I'll either do push up or do pullups, then rest on Sunday. I'm starting to see results too! Fantastic.

I'll read up on the burst training thingy that you're so enthu about. I still love that your book recommendation last time haha