One common criticism of the government is that it delayed the lockdown for too long because it failed to appreciate just how quickly the coronavirus would spread – a daily R0 of two means that one case becomes more than 16,000 within a fortnight. One scientific adviser says the Sage group “were not sure the politicians understood its exponential spread”.
This accusation is plausible because it is a common error to underestimate the power of compound growth. The late Albert Allen Bartlett, a physics professor at Columbia University, said: “The greatest shortcoming of the human race is our inability to understand the exponential function.” He was exaggerating: there’s plenty of competition for the title of the greatest shortcoming of the human race. But he had a point. And it is a shortcoming that can cost investors dearly.
For one thing, underestimating the power of compounding causes us to underestimate the importance of reinvesting dividends. Since December 1999 the All-Share index has risen a mere 1 per cent. But if you had reinvested your dividends from it, you would have doubled your money. Even low exponents multiply a lot over time.