From Jacob Bernoulli's compound interest question (Quaestiones nonnullae de usuris, 1690), made a habit of business thinking by Charles Munger (A Lesson on Elementary, Worldly Wisdom, 1994).
Judges options by their effect on a rate that repeats over many cycles, since small differences in rate grow into large differences in outcome.
When to reach for it
When a decision plays out over many years or cycles, as with skills, savings, relationships, or reinvested gains.
How it runs
- Count the cycles the decision will run over.
- Estimate each option's gain per cycle.
- Multiply out the cumulative result for each option.
- Compare the spread, usually wider than the rates suggest.
- Favor options that sustain the rate over a short-term gain.
Where it sits in SOLVE eX
Go to the source
- Quaestiones nonnullae de usuris, Acta Eruditorum, 1690
- A Lesson on Elementary, Worldly Wisdom As It Relates to Investment Management and Business, USC Business School talk, 1994