Tuesday, January 20, 2015

Compounding Technology

If you invested one cent in the year 1 AD, earning two percent interest annually, how much money would you have today?

Millions? Billions?


You would have over 1.5 quadrillion dollars. That's 1.5 million billions.

What if you received ten percent interest? Well, then you would have more dollars than there are atoms in the known universe.

The math is straightforward. But I was shocked when I first heard it.

Why the disconnect between the math and our mental estimate? Our natural inclination is to think linearly. Most physical things that we have interacted with over the ages behave linearly. If I turn the faucet in my sink, I expect a linearly corresponding amount of water to come out. If I want my cookies to be a little more well-done, I will leave them in the oven a linearly corresponding amount of time.

But compounding interest does not behave linearly. The reason makes sense: each year's compounding means that next year you have more to fuel the process. It's something of a positive feedback loop. Compounding interest thus behave exponentially - and the math shows that.

Technology exhibits this same compounding effect.* Think about the latest darling in technology: the smartphone. That was built upon technologies that came before: cellular transmission and the internet. Those technologies were, in turn, built on prior tech: radio/tv broadcast and computers. We could trace further back to semiconductors, then to metal refineries, and so forth.

Each new innovation doesn't just move us forward, it accelerates us forward. Moore's Law seeks to quantify this effect. It states that computational processing power doubles every 18 months. If that were your bank account, that would mean that you would earn about 60% annual interest.

So what does that mean for us, right now? Well, think about all of the technological progress we have made in the past 30 years. In the next 30 years, we can expect an increase of about one hundred million percent. What does one hundred million percent of our current technology look like?

I certainly don't know. But it sure will be fun to watch it unfold.

*If you read my blog often, you'll notice that I often write about what I'm currently reading. This post was inspired by Ray Kurzweil's The Singularity Is Near. It will likely inspire several more posts.