Home > The Master Plan > Diminishing vs Exponential Returns

Diminishing vs Exponential Returns

Before I start talking about my financial turn around, I think it’s important that we go over a few simple definitions. These next few concepts help to explain my framework for decision making as it relates to my life in general.

Exponential marginal returns – Let’s assume that for each activity we spend time on, we receive a certain increase in that skill level.  If one day, I spend 1 hour cooking, I might increase my cooking skill 1%.  Let’s say that the next day I spend another hour cooking, I will probably increase my cooking skill by another 1%. After 10 days of this, I will have increased my cooking still by 10.5%.   As you can see, my cooking skill grows faster as I practice more, or exponentially.  Since cooking is a pretty limitless field (there is always more to learn), the more time I spend cooking, the more my cooking skill increases.

Diminishing marginal returns – Now let’s consider running a mile.  Let’s say that you can run a mile at a 10 minute/mile pace and your main concern is decreasing your mile time.  For every hour you invest training, you get a little bit faster.  At first you will see huge gains every time you run, and then your gains will start to slow down.  Since humans can only run so fast, every additional hour I spend training, gets me less and less return.  This how I think of diminishing return.

Wikipedia defines a diminishing return as “the decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased”.  The point is, a lot of activities in life have diminishing returns.  Anything from increasing your running speed, to getting enjoyment from watching TV, to how frequently you wash your sheets have diminishing returns.  The more you do it, the less benefit you get from it.  Eventually, the benefit from your invested time, becomes so small that it is barely worth trying to improve upon.

This is from wikipedia’s “Diminishing returns” page.

With these two concepts under my belt, I can move on.  I specifically didn’t mention cash, because when I had my moment of realization, I didn’t truly understand how money grew exponentially.  Now I have  a framework to understand what sorts of things I should spend a lot of time learning about, and what sorts of things I should just figure out the basics and move on.  While rebelling from the typical money “norms”, I have made a number of mistake spending too much time on ideas with diminishing returns.  I’ve also spent too little time on ideas of exponential returns.  I’m sure I will continue to make these mistakes, but I think it’s important to fail often and learn from my mistakes.

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  1. November 20, 2012 at 9:16 AM

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