Confounding Compounding Interest

3 months ago

The legend goes that one day a traveling sage was challenged by the king to a game of chess.



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For those of you who are not familiar with this story let me continue...

“The king was a big chess enthusiast and had the habit of challenging wise visitors to a game of chess. One day a traveling sage was challenged by the king. To motivate his opponent the king offered any reward that the sage could name. The sage modestly asked just for a few grains of rice in the following manner: the king was to put a single grain of rice on the first chess square and double it on every consequent one.

Having lost the game and being a man of his word the king ordered a bag of rice to be brought to the chess board. Then he started placing rice grains according to the arrangement: 1 grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on…

Following the exponential growth of the rice payment the king quickly realized that he was unable to fulfill his promise because on the twentieth square the king would have had to put 1,000,000 grains of rice. On the fortieth square the king would have had to put 1,000,000,000 grains of rice. And, finally on the sixty fourth square the king would have had to put more than 18,000,000,000,000,000,000 grains of rice which is equal to about 210 billion tons and is allegedly sufficient to cover the whole territory of India with a meter thick layer of rice. At ten grains of rice per square inch, the above amount requires rice fields covering twice the surface area of the Earth, oceans included.”

In other words this is an example of exponential growth.

We would be foolish to think that anybody would agree to the terms that would result in a payout like the rice and chessboard legend.

But what about a different payout that achieved high growth, though not quite exponential?

What would we say if maybe there was another way?

Something you may have heard of and even read about in a resteem?

The type of growth that I am referring to now is that of the title Compounding Interest.



Compounding Interest
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The thing is the math behind compounding interest works!

“Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest.”.

The point I am going to make is that although in mathematical theory compounding interest is real, try to find it in the real world.

Besides the earlier resteem, I also resteemed the [Follow Up Post:] 4 Years From Today You'll Have Over $150K USD - True or False? - or - Can Worst Case Scenario Be Even Worse?

Growing up we were shown examples of how we could put our money in a savings account that at 10% compounding interest would grow and grow and grow (similar to the chart graphic above)!

Probelm was, that bank didn’t offer 10% compouniding interest.

Then when I got a job the HR had what amounts to a sales rep come and explain that we have the option to invest in a retirement vehicle that could grow at great returns.

It wasn’t offering compound interest, but was suggesting how big our retirement could get with 10% annual returns.

Trouble is they can’t guarantee 10% annual returns.

In fact you might lose it all!



Lost it!
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The mythical explosive growth, whether exponential or compounding is sure to be elusive.

Anyone capable of making such a payout, probably has no interest in agreeing to such a deal.

Those who have the means, have them becauses they are able to make deals that don’t end up badly for themselves.

Maybe there is somewhere out there that has a way for you to know guaranteed returns, but until then we are all searching for them!


Stay tuned.
Stay interesting.
Stay Strange.



Michael


Created by Michael Paine

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Nice post about compounding interest and exponential growth. It's interesting to see how many sectors of the economy are growing at one of these two rates. Machine learning/AI appear to be on an exponential track on both the hardware and software sides of the equation. Nowhere to go but up as they say? Who can know I guess.

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Thanks!

As for the future, well... we shall see...