Try answering this
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
long would it take for the patch to cover half the lake?
If your answer is 24 days – the answer is wrong. The right answer is it takes the lily pad 47 days to cover the whole lake.
Since the lily pad doubles every day and on the 48th day the lily-pad covered the whole lake, the day before it would have covered only half the lake.
The riddle is an example of the exponential function at work. Humans have difficulty in computing the exponential function. We tend to think linearly. We normally extend our linear thinking to investing too. Investing however is exponential in nature. Money compounds when invested and if allowed to.
The riddle re-framed could state;
“A man has a retirement corpus of Rs. One crore. He has doubled his money every 7 years. He has taken 35 years to reach this target. How many years ago was he worth 50 lakhs?
The answer is 28 years. Which means it took 28 years to accumulate 50 lakhs and in the next 7 years he made as much as he made in the preceding 28 years. Counter-intuitive but true .
This is the power of compounding. The way we need to think about investing is: how long will it take to double my money and what time frame do I have?
When you think investment, don’t think linear.
If your answer is 24 days – the answer is wrong. The right answer is it takes the lily pad 47 days to cover the whole lake.
Since the lily pad doubles every day and on the 48th day the lily-pad covered the whole lake, the day before it would have covered only half the lake.
The riddle is an example of the exponential function at work. Humans have difficulty in computing the exponential function. We tend to think linearly. We normally extend our linear thinking to investing too. Investing however is exponential in nature. Money compounds when invested and if allowed to.
The riddle re-framed could state;
“A man has a retirement corpus of Rs. One crore. He has doubled his money every 7 years. He has taken 35 years to reach this target. How many years ago was he worth 50 lakhs?
The answer is 28 years. Which means it took 28 years to accumulate 50 lakhs and in the next 7 years he made as much as he made in the preceding 28 years. Counter-intuitive but true .
This is the power of compounding. The way we need to think about investing is: how long will it take to double my money and what time frame do I have?
When you think investment, don’t think linear.
