After 11 years of strong financial growth and blossoming stock markets worldwide, it finally happened – financial markets in correction, red headlines spreading panic and a world that feels like its on the edge of an apocalypse.
A correction in the financial world has been due for a long time, but, if you had asked experts 6 months ago on what would trigger it, close to none would have been able to foresee a pandemic being what threw the markets into a crisis. The coronavirus is being called a Black Swan – a popular expression to describe an unknown threat. But did this threat really come out of nowhere? In my opinion, no, but it again proves one of mankind’s biggest weaknesses:
… We do not understand exponential growth
In our everyday life, we are used to relating to linear growth. Our paychecks increase slightly each year, we pay our mortgage off bit by bit and our after-work beer gets a bit more expensive every year. With exponential growth, the math looks completely different and we lose sight of the bigger picture.
The best example to explain exponential growth is as follows: picture yourself chained to the uppermost row of a football stadium at 12 pm, then, a drop of water is placed in the middle of the field, doubling every minute. How much time do you have to get free? And when will you realise that it is urgent?
The answer surprises many. After six minutes, the water fills a thimble. After 45 minutes, 7% of the stadium is filled. The “hockey-stick” showing the exponential growth arrives at 12.49 pm and fills the entire stadium. In other words, you’ll have 45 minutes where it looks as if everything is under control and only 4 minutes where you see the indications of it being too late. Sound familiar?
Other areas with exponential growth:
High-interest loans (credit cards, etc)
What starts as a smaller loan to buy a washing machine inevitably ends up as an uncontrollable debt if not paid back right away.
Technology has exponential growth, which has given us products and services we never would have envisioned 20 years ago. While we used hundreds of years to evolve from horses to cars, we used dramatically less time to evolve from fax machines to smartphones.
When resources and access to vaccines become almost unlimited, populations exhibit exponential growth as explained by this graph.
Do the math
It is not likely that we, as a society, suddenly will become able to comprehend how exponential growth work, but I would like to offer this advice:
The next time you are told something is increasing at a dramatic rate, do yourself a favour and do the math. In this specific incident, it could have saved you overcrowded grocery stores, an equity portfolio cut in half and even weeks of quarantine.