The Great Exponential Blind Spot

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The Great Exponential Blind Spot
TobiasD / Pixabay

Every human eye has a blind spot.

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The optic nerve, which carries visual data from the eye to the brain, exits the rear of the eye.

And that tiny exit contains no light receptors.

A blind spot.

We are unaware of our twin blind spots because the brain interpolates missing detail from the opposite eye.

And fools us into thinking we receive a complete image from each eye when, in fact, each eye is partly blind.

You can prove it to yourself.

Just look at the plus sign below.

Notice the zero to the right.

But focus on the plus sign.

Now close the left eye.

Slowly move closer to the screen.

But never look away from the plus sign.

The zero will disappear.

That is your blind spot.

+                                                                                                                       0

Shocked?

Don’t be.

We have many perceptual and cognitive blind spots of which we are unaware.

Compared to our dogs we are almost smell-blind, though we take little notice.

Most aging men have poorer hearing than most aging women, but most men don’t notice it. (“Yes, dear.”)

And most people don’t think as clearly as they believe they do.

Especially the people who think least clearly.

The Dunning-Kruger effect.

Or as Mark Twain folksily put it:

“It ain’t so much the things that people don’t know that makes trouble in this world, as it is the things that people know that ain’t so.”

One thing people know that ain’t so is that things’ll go on pretty much as they’ve been.

Rather than constantly change, as they plainly do.

Most changes are hard to predict.

Though armies of TV pundits make a good living predicting them.

Usually erroneously.

Yet one form of change is highly predictable:

Exponential Growth And Decay

You learned exponents in grade school.

Powers.

Two to the third power is 2 x 2 x 2 = 8.

Two to the twenty-fifth power is 33,554,432.

But you weren’t taught to apply exponents in everyday life, where they really work!

Exponential growth and decay are oddly invisible to us.

So we barely notice inflation at 2% per annum.

Even though after 50 years a dollar isn’t worth a dime.

And we don’t pay attention to a virus infecting a half-dozen people on the other side of the world.

Until a few months later it’s killing our relatives, neighbors, coworkers and friends.

Physicist, Albert Allen Bartlett, taught:

“The greatest shortcoming of the human race is our inability to understand the exponential function.”

For a mind-blowing class on the exponential function, taught by the great professor himself, go to:

The Blind Spot in Investing

Here are three ways the exponential blind spot can undermine your investment strategy:

  • Focusing on day-to-day market fluctuations instead of long-term exponential growth!

As Charlie Munger teaches:

“The big money is not in the buying and selling, but in the waiting.”

Media love the immediate and eye-catching:

Hot stocks and big movers are news.

Hard work and compound interest are not.

Have you ever seen a financial story about hard work?

Or more than a brief nod to compound interest?

Even though hard work and compound interest pave the slow and certain road to wealth.

But they don’t put asses in the seats or glue eyeballs to the screens.

  • Paying a 1 or 2% annual fee to a money manager without realizing the true cost!

As Warren Buffett teaches:

“If returns are going to be 7 or 8% and you’re paying 1% for fees that makes an enormous difference in how much money you’re going to have in retirement.”

If you invested $10,000 per annum in a nontaxable retirement account and earned 8% as in Warren Buffett’s example you would have $3,140,862 after 40 years.

Surrender just 1% per annum in fees to a money manager, your nest egg shrinks to $2,348,307!

A quarter of your retirement lost to the exponential blind spot!

  • Failing to appreciate Albert Einstein’s “Eighth Wonder of the World!”

Albert Einstein reputedly said:

“Compound interest [exponential growth] is the Eighth Wonder of the World.

He who understands it, earns it.

He who doesn’t, pays it.”

If you began investing, as Warren Buffett did, at age 11, and put $1000 annually in a tax-sheltered index fund, earning 8%, as in Warren’s example, and lived to Warren’s current age of 91, your $80,000 investment would have grown to roughly $7,000,000!

The downside of Einstein’s pronouncement:

The innocents forever burdened by credit card balances who are sucker-punched monthly by double-digit interest, late fees and penalties to keep them poor and indebted for the rest of their lives.

As Tennessee Ernie Ford sang, “I owe my soul to the company store.”

To grasp the full weight of Ford’s ballad of poverty and indebtedness go to:

That said, we must ask ourselves the pointed question raged at every baseball umpire who ever made a bum call:

"Are You Blind?"

The painful answer is: yes, we are all blind.

In spots.

Now you know one of those spots.


About the Author

Mark Tobak, MD, is a general adult psychiatrist in private practice. He is the former chief of inpatient geriatric psychiatry and now an attending physician at St. Vincent’s Hospital in Harrison, NY. He graduated the University at Buffalo School of Medicine and Columbia University School of General Studies. Dr. Tobak also has a law degree from Fordham University School of Law and was admitted to the NY State Bar. His work appears in the American Journal of Psychiatry, Psychiatric Times, and American Journal of Medicine and Pathology. He is the author of Anyone Can Be Rich! A Psychiatrist Provides the Mental Tools to Build Your Wealth, which received high praise from Warren Buffett.

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