tag:blogger.com,1999:blog-13306522.post186421243724329302..comments2022-04-27T17:28:39.018-07:00Comments on Adventures of BruteForce: Compounding Isn't IntuitiveBrute Forcehttp://www.blogger.com/profile/10214183612902971524noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-13306522.post-11763136181032152682007-08-09T06:17:00.000-07:002007-08-09T06:17:00.000-07:00When pre-paying a 6% mortgage rather than investin...When pre-paying a 6% mortgage rather than investing at 8%, most people think "Well I'm only losing 2%, that's not worth the risk." But as you've shown, compounding does not add linearly, so after 30 years you get:<BR/><BR/>1.08^30 - 1.06^30 > 1.02^30<BR/><BR/>In this case the difference is actually close to 1.05^30. The long-run behavior is more like:<BR/><BR/>1.08^n - 1.06^n = 1.08^n (roughly)<BR/><BR/>where n, granted, is a bit greater than 30Jonhttps://www.blogger.com/profile/03060882352687149007noreply@blogger.comtag:blogger.com,1999:blog-13306522.post-37377705825864079522007-08-09T06:00:00.000-07:002007-08-09T06:00:00.000-07:00I think the tip here is to realize that our intuit...I think the tip here is to realize that our intuition about investments may not always be correct, and we should run the math before making decisions. I know I tend to give too much weight to my intuitive feelings, especially when I'm pressed for time (or the math is complex). The example isn't a choice I'll ever have to make, but it did show me that I'd have chosen incorrectly, if I'd chosen intuitively.Anonymoushttps://www.blogger.com/profile/17191395962391222580noreply@blogger.comtag:blogger.com,1999:blog-13306522.post-44967791205128823712007-08-09T05:49:00.000-07:002007-08-09T05:49:00.000-07:00The power of compounding interest is indeed great....The power of compounding interest is indeed great. However your post illustrates that using numbers that will never exist, not even plausible, without the consideration of risk.<BR/><BR/>So while readers can be awed once again by the power of compounding, there is no real tip here due to the ridiculous parameters passed into this scenario.Adamhttps://www.blogger.com/profile/06311556152910798398noreply@blogger.com