Compounding

Notes

This is the idea which some actions have exponential value over time, or that they synergizes well with other actions. Instead of getting the same return when preforming this action, you get higher returns the more you do it/ keep on doing it Consistency, which is the opposite of Diminishing Returns.

Even if we Start Small, we can get meaningful returns later on. The only disadvantage is that it requires us to be patient, and at first the Upfront costs might be higher than the initial returns, or that it would seem that we get so little back which would make us question our behavior. Only once we cross the level of Critical mass, we would be able to see the huge return of our investment.

Compounding is not limited to a specific field, we can find examples in the financial world - compounding interest which usually revolves around savings, but also in the world of habits, such as keeping good habits which gets easier to do as time goes by Habit formation. So as long as we Trust the Process and maintain our current course, we can achieve something great.

For example, getting better 1% each day, you get 37 times better at the end of the year, while getting worse by 1% each day can also be very harmful:

1.01^365 = 37.78% 0.99^365 = 0.02%

Compounding can also be seen as a type of "positioning", while the benefits might not be daily, by working constantly towards your goals or optimal lifestyle you put yourself in a better position in life when opportunities arise. For example, being a hard worker will pay off when the boss will consider who to promote, or being a good friend will also be beneficial once you're in a crisis. Essentially, your hard work is not lost from day to day but stored each time.

Compounding also helps us avoid Present Bias, because we the expected returns are higher the sooner we start, so it's best to do it now rather than later.

Visual

Overview

🔼Topic:: Habits (MOC) Origin:: Atomic Habits (book) Origin:: Clear Thinking (book) 🔗Link::