The Magic of Compound Effect

By Lu


 

The British Cycling Kaizen

British Cycling changed its course in 2003.

When Dave Brailsford became the performance director of British Cycling in 2003, the team had almost no record of success, having won only a single gold medal in its 76-year history. Since then, it quickly changed as UK won golds at the Olympic events, and cycling largest event, the Tour de France.

Brailsford was noted for his innovative concept of ‘marginal gains’. A 1% improvement everywhere would aggregate the tiny gains into radical improvements over a period of time.

The Payoff of Compound Effect

The compound effect is the principle of reaping huge rewards from a series of small, smart choices.

In the beginning, there is basically no difference between making a choice that is 1 percent better or 1 percent worse. There is no noticeable difference. But as time goes on, these small improvements or declines compounded, and you suddenly find a very big gap between people who make slightly better decisions on a daily basis and those who don’t.

This is why small choices don’t make much of a difference at the time, but add up over the long-term.

Small, smart choices + Consistency + Time = Radical Difference

The Magical ROI Coin

If I give you a choice between a penny that will double in value everyday and $3 million in cash upfront. Which one will you choose? A penny or $3 million?

If you heard this before, which I did because I studied Actuarial Mathematics in university, and this is a large portion of the course, you will know that the penny gambit is the choice that will lead to greater wealth. Yet, why is it so hard to believe that choosing this penny will result in more money in the end? It’s because it takes so much longer to see the payoff.

Here’s how the math goes. If I take the cash upfront, woohoo, I got $3 million now. I’m a millionaire! While my friend took the penny route.

On Day 5, my friend has sixteen cents. 1, 2, 4, 8, 16. While I have $3 million.

On Day 10, it’s $5.12 versus my big lump sum. How do you think my friend is feeling at this time about his decision? I’m spending my millions and enjoying it all and his five dollars.

On Day 20, with only 11 days left. The penny route has only $5,243. How will he feel at this time? Despite all the sacrifice and positive feeling, it’s $5000 versus $3 million. I can tell you. It sucks, and I had been in these financial positions before, and often, unable to shoulder the regrets.

Then, on Day 31, compounding kicks in with a bang, and that penny is worth $10,737,418.24. More than three times my $3 million. Wow.

Here, consistency over time is so important because even at Day 29, I got my $3 million, with my friend has around $2.7 million. It isn’t until Day 30 that my friend pulled ahead with $5.3 million, and only on the very last day of this 31 day journey is the penny route worth $10.7 million.

The Three Friends

Let say we have three normal individuals. A, B, and C who are long-time friends but seldom meet each other. Each lead identical life. The same 9 to 5, wife, children and everything. Then, they meet up one time and are surprised by how similar the three of them look like each other. They cheered with their beers and made a promise to see each other again.

A returned and continued his life as usual. The same meal, the same routine. B returned and decided to cut some calories from his daily life Let say 100 calories. Nothing out of the ordinary. Just simple steps anyone can take. Maybe 1 less slice of bread for breakfast, or swapping his usual soda for iced water. Or even just a 15 minutes detour to stroll around the park on his way back from work.

C went back and installed a bar at the corner of the living room where his favorite alcoholic beverage is always in view. Because of this, each time he passed by the bar, he took a sip for himself. Just a tiny sip.

Half a year passed by, and the three friends gather again for a reunion. They cheered and returned to their homes. Everyone still looked similar to each other.

Another half a year passed and the three friends meet up again. There isn’t anything different now, except for maybe B had to pull his belt a notch tighter, while C is slightly plumper around the waist.

Then, another half a year, and this time, everyone looked different. A remained the same, while B has a slimmer waist a taunt jawline. At the same time, C is overweight with a beer belly protruding from his waist.

Nothing else is different. A continued his life as normal, while B cut off 100 calories from his daily life, and C had another sip of his favorite drink. Yet, this lead to drastic physical changes over a period of time.

The Ripple Effect

The example above may seemed dramatic, it goes deeper than that. In reality, one small change can have a significant impact that caused unexpected ripple. C’s frequent drinks makes him a bit sluggish at night. He wakes up a bit groggy, which makes him cranky. This grogginess soon affect his work performance as he’s less productive.

His manager noticed this, and as a result, gave C discouraging feedback. At the end of the day, he’s unhappy with work and his manager, and his stress level went up. He compensated for this by eating more.

He brings the negative thoughts back home, and choose to keep to himself, distancing himself from his wife. His wife received less affection, and their relationship became strained.

All these negative feedback has an ability to feed into each other and snowballed to something larger. That’s the ripple effect. Unfortunately for C, the small choices he made on a daily basis created a ripple that wreaked havoc on every area of his life.

This ripple effect can both be a positive or negative thing.

In high school, I scored 15A1 in my public examination, which is probably equivalent to As in 15 O level subjects. I was one of the highest achiever in the country, but I don’t think I was anything special compared to my peers.

I wasn’t the most hardworking student growing up. In fact, you can go to my report card and see what my teacher wrote for my parents about me. Smart, but lazy. Yeah, I wasn’t above doing the bare necessary. Others went for tutoring session while I spent my afternoon watching cartoons.

Yes, I like to move ahead at my own slow pace.

The only thing I held sacred was my homework. Regardless of anything, I have a compulsion to finish all my homework on the day I received them. And that’s it. Because I wanted to finish all my homework (while watching cartoon at the same time), I will park myself in front of the tv while filling in the exercise books with answers. If I am stumped, i will picked up the reference books and flipped through them.

I almost always managed to finish my homework before bed, and this build a confidence in me that I can study anything. And because I always handed in my homework on time, my teacher praised me that created a positive feedback loop that ticked my interest in certain subjects and I excelled in them.

You see, all these positive reinforcement simply because I choose to finish my homework on time everyday snowballed by the time I have to take the public examinations. Other choose at most ten subjects, or less, while I go for fifteen because I believed that i can do it.

And I did, which allowed me a full scholarship to study mathematics in US. There, I made connections and life decisions that impacted me good and bad to this day. If it wasn’t for my initial choice, I probably won’t be studying abroad, and my life path will be different.

  • Remove “insta-result” Choices => Behavior => Habits

Understanding compound effect should remove the expectation of “insta-result”. Many times, even I felt that I am spoiled by all the instant gratification all around me. Instant messaging, automatic hot water, Youtube.

It’s hard to wean off expectation of insta-result when I’m so used to it. But understanding compound effect means that I can also tell myself that it’s okay to choose the choices with less instant gratification but ultimately lead to a better outcome in the long run.

Choices => Behavior => Habit

My choice of always detouring to the bakery to pick up a donut after lunch, had me on a sugary high addiction, and lead me down habits that lead down towards an expanding waistline. My stomach will always squelch at the sight of donuts and my brain will send out a signal that its hungry even when I just had lunch to urge me to buy the sugary snack.

I realized about this when my pants felt a little tight. I realized the donuts were leading me down an unhealthy lapse. I had to do something and that was to kick off the trigger point of buying donuts by not heading to the bakery on the way back to work from lunch. Such simple measure is enough to stop this bad habit.

By not crossing path with the bakery, I will not see the donut and thus, don’t carve for it, which won’t lead me to a sugar crash and a more productive afternoon at work. It’s a simple daily choice but over time, my belly will thank me for it.

How to Put This Compound Effect to Work for You

  • Decide which areas you want to improve on. Are there any excuses that you are clinging on that is stopping you from getting ahead?
  • Write down a few small, seemingly inconsequential steps that you can take everyday that can take your life in a positive direction.
  • Write down a few small, seemingly inconsequential steps that you can stop doing everyday that might be compounding your results downward.
  • List a few areas, skills or outcomes that you had been successful in the past. Consider whether you had been taking them for granted, and is not continuing to improve, leading to complacency when you can instead pivot them for further success in the future.