One of the most interesting features of human intellectual history is that often the best ideas stem from simple observations.
The human mind is a linear device—not only do we tend to take current events and extrapolate them into the future, but our experience of time is also linear: we perceive life as a beginning and an end. Naturally, then, we tend to think about investments and investment time horizons in a linear way too.
But this isn't the way the universe works. Time is actually a dimension—the same as the three dimensions of space. It bends and moves and even can double back upon itself. Even the universe expands (and possibly contracts) in a varying, non-linear way. It took physicists hundreds of years to surmount our natural perception of the world and come to terms with this notion.
Simply, linear progression isn't the way of most human progress nor is it a fundamental way the universe even works. Most of the history of life has been a function of exponential returns. And if it's true for the cosmos, well, it just might be true for investments too.
Back in 1970 Gordon Moore (a co-founder of Intel), coined the idea known today as "Moore's Law."
- The complexity for minimum component costs has increased at a rate of roughly a factor of two per year...Certainly over the short term this rate can be expected to continue, if not to increase. Over the longer term, the rate of increase is a bit more uncertain, although there is no reason to believe it will not remain nearly constant for at least 10 years. That means by 1975, the number of components per integrated circuit for minimum cost will be 65,000. I believe that such a large circuit can be built on a single wafer.
In plain language, that says the speed of microchips will double every 24 months as technological breakthroughs continue and accelerate the pace of change.
In 2001, Ray Kurzweil wrote an essay called "The Law of Accelerating Returns." In it, Kurzweil proposes an extension of Moore's law and extends it to include technologies from far before the integrated circuit all the way to future forms of computation. He declared that, whenever a technology approaches some kind of a barrier, a new technology will be invented to allow us to cross that barrier.
Kurzweil is one of the leading inventors and scientists on artificial intelligence in the world. Among other things, he was the principal developer of the first omni-font optical character recognition, the first print-to-speech reading machine for the blind, the first CCD flat-bed scanner, the first text-to-speech synthesizer, the first music synthesizer capable of recreating the grand piano and other orchestral instruments, and the first commercially marketed large-vocabulary speech recognition.
Kurzweil predicts that such paradigm shifts will become more and more common as time goes on. He believes that the exponential growth of Moore's law will continue beyond the use of integrated circuits into nearly all facets of life from healthcare to travel.
- An analysis of the history of technology shows that technological change is exponential, contrary to the common-sense 'intuitive linear' view. So we won't experience 100 years of progress in the twenty first century—it will be more like 20,000 years of progress (at today's rate). The 'returns,' such as chip speed and cost-effectiveness, also increase exponentially. There's even exponential growth in the rate of exponential growth.
Kurzweil founded this concept by observing that it's been true throughout history: he applied it not just to technology, but to the history of civilization, and even the rate of change in evolution as species developed across the earth.
Here are a few images of Kurzweil's principle of acceleration in action:
This is a fascinating idea in itself…but also has important implications for investors. In essence, the law of accelerating returns is the close sibling to the financial concept of compounding returns—where the growth of an investment over time compounds into larger and larger sums with interest. Look at any chart of the S&P 500 or the Dow Jones over a long time period—these are not linear graphs but evidence of exponential compounding returns.
Moreover, should Kurzweil's ideas prove even partially correct, it means innovation, productivity, and prosperity is headed for a boon almost no one can fathom. And we like fathoming the unfathomable when it comes to making investment choices.
A perfect example was just announced today:
Quantum computer to debut next week
By Peter Judge, Techworld
That scientists are discovering the law of accelerating returns is a common and observable feature of human nature, civilization, and technology is a powerful reminder that the similar principles of free markets and capitalism are also a noble endeavor in human development. Linearity may be what we experience, but acceleration is the reality.
For more about Mr. Kurzweil and his theories, visit:
Have a great weekend.
Sources: http://en.wikipedia.org/wiki/Moore%27s_law and http://en.wikipedia.org/wiki/Ray_kurzweil