Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.
In finance, the essential concept is the power of compound interest. It states that the future value derives from the present value with an interest rate, compounded over a period of time. Put it in a math formula:
where FV is future value, PV is present value, r is interest rate, n is period of time.
This simple equation also applies to how we acquire knowledge. Our future knowledge derives from our present knowledge with fundamental principles, compounded by our degree of curiosity.
where FK is future knowledge, PK is present knowledge, p is fundamental principles, c is degree of curiosity.
Present knowledge is what we know now that applies to the world. Writing an article in English requires knowledge of the language. Developing a mobile application requires knowledge of mobile technology. Investing in a stock market requires present knowledge of math and finance, etc. We rely on our present knowledge to navigate the world. The more we understand how things work, the more productive we can be.
Future knowledge is what we are going to know that applies to the world in the future. The future world presents different challenges and situations, and we will need new knowledge to solve them. Predicting the future is hard, but we know that what works now might not work in the future, and we need to learn new things in the face of any new uncertainty.
The bridge between the present and future knowledge consists of two factors: fundamental principles and our degree of curiosity. If we have a good understanding of fundamental principles, and we have a curious mind, then our knowledge of a subject will compound well.
Fundamental principles are the core concepts that build other knowledge. The decimal numeric theory and elementary algebra are the core concepts behind any modern science. Basic linguistic science serves as a foundation for human and machine language. The idea of compounding is the center of any financial system. Having a solid understanding of these fundamentals provides us a blueprint in understanding more detailed information. Without such understanding, we might feel disconnected from what we try to learn, hence limiting our understanding of them.
Our degree of curiosity is our level of desire to ask why. When facing any unknown phenomena, it’s easy to pass it on rather than asking why. However, asking whys and seeking to understand them encourages us to peel off layers of a problem. The higher our degree of curiosity, the more details we will tend to seek. The more details we seek, the closer we get to understand the fundamentals of a subject. For example, when learning about music, we can enjoy listening to a piece of music. If we want to go a bit deeper, we may decide to learn an instrument and make music ourselves. If we still want to go deeper than that, we may look into music theory and understand why certain sounds are pleasant while other sounds are not.
How does this model help acquiring new knowledge? Whenever we are learning a new subject, stay curious and seek to understand the fundamentals behind that subject. And our understanding of a subject will compound well over time.