Update to Circle of Competence Framework and Exponential Processes

Update to Circle of Competence Framework & Exponential Processes

“Bubbles form whenever a new story is not only told, but can also be sold” - Brent Goldfarb

July Letter Update – Revisions to Circle of Competence Framework

In my first Letter to Learners in July, I proposed a simple framework for thinking about how your Circle of Competence develops in a particular area. But after feedback from a couple readers (thanks Clayton Dorge and Sean Iddings), I wanted to update this from a step-by-step process to more of a ‘curiosity flywheel.’ Here are Clayton’s thoughts:

“I see this framework as a learning or Curiosity Flywheel (Curiosity, Knowledge, Conviction, Action). Once you take a properly convicted action, I believe a new curiosity is born. When you have skin in the project or posted it publicly, you know are learning about the topic from new angles and have new questions you wouldn't have known to ask when you begin.  This new level of curiosity is a higher/better level too. Because you're 'in it' the Dunning-Kruger effect is minimized. Over time this curiosity flywheel can become highly efficient and you improve as a learner! An important thing to keep in mind once you take a convicted action, it is a self-fulfilling prophecy. You now have more investment into an idea/project and thus it's more important and challenging to keep yourself objective and see the pitfalls with your idea/project.”

In addition to the above feedback, Sean Iddings added that it is important to know what knowledge is most important and how to apply it. In a nutshell, this involves developing discernment in your field of expertise, knowing how to apply the knowledge and course correcting when necessary. This in turn is a part of the conviction, action, then further curiosity flywheel effect. This helps you create your own competitive advantage of continuously increasing competence, which leads to both hyper adaptability and deep interdisciplinary knowledge.

Instead of perceiving this process as an end-goal oriented one, it is better to view it as a ‘growth without goals’ flywheel:

Notes:

Growth without goals (Patrick O’Shaughnessy)

Problems in higher education, part I (Circle of Competence)

Problems in higher education, part II (Circle of Competence)

Exponential Processes

Exponential growth abounds in modern society - economic growth within the past 5 centuries has allowed us to escape the Hobbesian, brutal existence of nature and submit the world to an orderly exchange of goods and services. In any particular domain of knowledge, exponential growth benefits both individual (for enlightenment and a higher quality of life) and society (cumulative knowledge leads to societal prosperity). Within our bodies, cancerous cells multiply through runaway exponential growth if not treated nearly enough. In companies, executives are either destroying economic value, treading water, or compounding economic value. Exponential processes surround us.

When we observe exponential processes, two questions often arise: ‘what causes the growth and what causes it to stop?’ Most environments in which we observe exponential processes are finite (e.g. the economy, our world, our bodies, an addressable market). Mathematically, an exponential growth rate carried forward many iterations would consume its entire domain space (the universe, an economy’s capital and labor, or a biological resource), so it makes intuitive sense that there are natural boundaries for the exponential processes in economics, biology, and business. The ultimate outcomes of exponential processes are limited by the feedback loops which fuel their growth and the size of their domain space. Thus, the exponential processes that operate the longest are those with the strongest flywheel and the largest domain spaces - a competitive advantage and a long runway, in investing speak.

Exponential processes are observed at the surface level as an explosion in the measured data point, but beneath the surface a feedback loop is propagating forward. This feedback loop is the mechanism that propels the exponential process forward. Let’s look at a few examples of exponential processes that can be modeled as feedback loops and consider the size of their domain space.

Human knowledge accumulation. This represents a very LONG runway on the individual level. Why? Because the fuel for an individual’s growth is all of humanity’s previously accumulated knowledge. This alone would take thousands of lifetimes alone to learn and master. The way to model this exponential process is to use the Circle of Competence flywheel above. Curiosity drives this flywheel which contributes to a growing base of knowledge. Fortunately, there is never an inflection point of slower growth as long as we live a life of continuous learning.

Drives the following experience curve:

And this individual process of growth and knowledge accumulation has enabled massive innovation cumulatively, which in turn contributes to the next exponential process, economic growth.

Economic growth. Opinions will differ on this, but I am a cautious optimist on the future of human innovation and believe there is a long runway for economic growth, provided we continue to make technological progress. Peter Thiel has made a compelling case that innovation has stagnated since the 1970’s and has called for renewed focus on what he calls the world of ‘atoms’, not just the world of ‘bits’, to fuel the needed innovation. At the bottom of our identity as Americans is a deep-seated belief in progress and economic growth, and Thiel’s argument is precisely that this exponential growth is imperative for society.

Without economic growth, society risks becoming a stagnant economic pie with higher and higher proportions allocated to ‘Capital’ vs. ‘Labor’, sowing the seeds for political unrest. The entire basis of Thomas Piketty’s Capital in the 21st Century is the historical fact that the returns to ‘Capital’ are higher than the returns to ‘Labor’, leading to higher concentrations of wealth in the hands of fewer and fewer people. It is a mathematical certainty that if economic growth slows or ceases, the pie will continue to be split more and more unequally, with the lion’s share going to those who risk capital compared to those who labor. Therefore it is imperative that human innovation continues in order to ensure a growing economic pie that raises all of society on an absolute economic basis.

Per capita economic growth requires productivity growth which requires new technology (innovation) to produce more goods and services with the same (or less) amount of capital and labor. Around 500 years ago, the idea of profit began to take hold, slowly eroding the old order of feudalism. It represented a simple solution to the low to no growth world of the medieval era: people were incentivized by profits to freely exchange their labor and capital to serve others. The leftovers (profits) were used to acquire more capital or pay more labor as leverage to serve more people. And the feedback loop began. When you propagate this feedback loop forward by 5 centuries, the results have been astounding. In the last century alone, America has gone from horse and buggy to (almost) autonomous driving vehicles, space exploration, and commercial flight.

New knowledge leads to new applications of the knowledge (innovation) which leads to productivity gains, freeing up our time to discover new knowledge and perpetuating the cycle.

“Civilization advances by extending the number of important operations which we can perform without thinking of them.” - Alfred North Whitehead

This cycle occurs simultaneously in many industries and leads to an increasing economic output per person:

While we may not all agree on the meaning and purpose of life, I would venture a guess that most will agree that the flourishing of the human race is a worthy goal for society, among other goals. If this is the case, then human knowledge accumulation is paramount because it will lead to innovation, which will lead to economic growth, which will allow us to live longer and higher quality lives. Thus, we arrive at our exponential process - humanity’s population.

Humanity’s population. Innovations in science, technology, medicine, philosophy and finance collectively led to an exploding population as people began living longer and healthier lives.

Remember my original proposition? Flywheels fuel exponential processes. I’ve tried to show the causal links, albeit potentially tenuous, between those of human curiosity, knowledge accumulation, collective innovation, economic growth, and last of all, population growth. And remember the other limit to an exponential process? The domain space. As our natural resources (non-renewables, water, food, raw materials) groan under the weight of our exponentially increasing population, there may not be any other choice in the long run to avoid competition and bloodshed over these resources besides… looking beyond Earth.

Who knows when these boundaries will be reached? Thomas Malthus thought we’d hit our limits over 2 centuries ago. And while this might be a Malthusian take on where we are as a human species, I believe in the next few centuries - I’d love others’ thoughts and any resources here - humanity should focus on space exploration more rather than less. We have conquered the ‘bit’ exponential frontier and Moore’s Law is beginning to reach its limit (quantum computing is up next). But speaking in Thielian terms on the ‘world of atoms’, we still have a LONG runway ahead in terms of exploration and expansion of the human population, our cumulative knowledge of the physical universe, and humanity’s cumulative wealth - whatever that means on an astronomical scale. 

As I said earlier, I’m a cautious optimist. There are many hurdles to achieving astronomical scale as a species, and exponential growth of this magnitude is impossible to predict. But one can hope for the success of those crazy enough to blaze a trail. Over a century ago, the Wright brothers began testing flying machines. Today Elon Musk, Richard Branson, Jeff Bezos, and others are testing interplanetary shuttles. Perhaps one day these men will achieve the same status as the Wright Brothers, on an extraterrestrial scale.

Postscript

Studying the process of exponential growth illustrates the basic principle that those who adopt a growth mindset will become exponentially more successful in the game of life – no matter what the area or skill. There is no maturity point with knowledge – just ask Charlie Munger. If you can discover exponential processes that have long runways ahead for growth (a certain company, a certain industry, a certain academic area, a certain genre of music – I could go on), there will be much fruit to gather. The only way to discover these types of types of growth opportunities is to build your knowledge base continuously, hence the reason for this blog and for adapting a continuous learning lifestyle. There is nothing stopping your ability to progress except ego, laziness, mental incapacitation, or death.

Notes:

The post that started my line of thinking on flywheels and exponential processes (Futureblind)

Peter thiel and Eric Weinstein on our low growth environment (The Portal)

The end of the future (Peter Thiel)

World population growth (Our World in Data)

*How and why we will colonize Mars (Wait but Why)

A few graphs to think about

Compounded Annual Returns for total market, recessions shaded.

10 year minus 3 month yield curve overlaid against real GDP, compounded annually. Recessions shaded.

Aaa, Baa, and high yield rates over the past 20+ years with ten year minus 3 month.

The top 50% of Americans hold 98.7% of net worth while the bottom 50% hold just 1.3%. The 50th percentile to 90th percentile has decreased from 35% in 1990 to 28% in 2019. The bottom 50% has decreased from 5% in 1990 to 1.3% in 2019.

Parting thoughts

-Capital, as long as it is made abundantly cheap by a dovish Fed reluctant to let financial markets slip into turmoil, will continue to drive on-paper wealth inequality. Are we past the point of no return, where low (or negative) interest rates are the new normal, with austerity and market rates simply too painful to bear?

- There are over $14 trillion of negative yielding fixed income instruments globally. Interesting times.

- Populism is on the rise globally, trade tensions are rising, and currency devaluations are underway in China.

- The 10 year minus 3 month and 2 year yield curves are both inverted.

- Perhaps the most salient example of market froth, the We Company is going public at towering multiples of revenue and ‘community-adjusted’ EBITDA (We Company S-1)

- Holding some cash isn’t a bad idea given the yield curve is inverted, the dollar is stronger than most other currencies relatively speaking, and opportunities could present themselves sooner rather than later.

- Speaking of which, Berkshire-Hathaway just hit a record ~$120B in cash on its balance sheet. The elephant gun is loaded. Is yours?

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Have I missed something? I appreciate any comments, feedback, and resources in the areas I’ve discussed above. Feel free to drop me a line at bentonmoss3@gmail.com.

Benton Moss

Circleofcompetence.co