Why compounding is so confounding

It starts slow, we look away — and then the doubling becomes staggeringly large
Compounding
Compounding

One big lesson of the coronavirus pandemic: Humans don’t intuitively understand how compounding works. We think we do, but on some innate level, it boggles our brains.

If the number of infected people doubles every two days, that’s exponential growth. It starts slow, with numbers so small we barely notice. One person infects two, who then infect four. Then, as we get bored and look away, the doubling becomes staggeringly large. 

You know who already knew that we didn’t know this? Economists. In this 2017 paper, researchers clearly saw that “people exhibit overconfidence in their ability to calculate exponential growth.”

Here’s the thing about compounding: It’s slow at first, and then staggeringly large

Because the problem we’re all having thinking about infection numbers today is basically the same problem we’ve always had with compound interest. When you invest your money at a good rate, you can make exponential growth work for you. It’s slow at first, and then staggeringly large. 

This pandemic will change our world in many ways. Let’s hope that one small — but eventually huge — thing that will change is how we think about exponential growth.