Early Retirement Extreme: A philosophical and practical guide to financial independence by Jacob Lund Fisker & Zev Averbach & Ann Beaver

Author:Jacob Lund Fisker & Zev Averbach & Ann Beaver [Fisker, Jacob Lund]
Language: eng
Format: azw3, mobi
Tags: Personal Finance
Published: 2010-09-29T14:00:00+00:00

This figure shows a sigmoid s-curve which can be used as a model to describe "return on effort" in terms of "effort" for many different kinds of "effort." For example, "return on effort" could be happiness and "effort" could be salary. Note that the curve is symmetric around the origin and that its rate of change is fastest at the origin.

Here the vertical axis describes the "return on effort" and the horizontal axis describes the "effort." Here "effort" measures some kind of input and return measures some kind of output. For example, the input could be time and the output could be money. The input could also be work and the output could be happiness, fitness, etc.

For the sake of discussion, let's consider a variable P and think of it as "Production." One way of thinking about P would be in terms of the cumulative number of pages I have written as the book project has progressed. The increase in production is proportional to the current production, because having already written and thought about the subject makes it easier to write more about it. However, the increase in production is also proportional to the potential for further production. In the beginning, this potential is high because there are many things left to write about, but as the book gets closer to the end, there are fewer topics to write about and so it becomes harder to just pick one and write about it. Here is a simple equation which summarizes this paragraph:54

(dP)/(dE)=P(1-P)

What it says is that with few resources (when P on the right-hand side is low corresponding to the lower left side of the figure and P(1-P)~P), the ability to change will be proportional to the resources. This works like compound interest and it'll create exponential growth. However, compound interest in itself never made anyone rich. Invest $1 at 8% and wait 30 years to get $10. This is hardly a worthwhile sum for 30 years of waiting. But invest $100,000 at 8% for 30 years and you get $1,000,000. That is real money. To get anywhere, it's thus very important to quickly build a substantial foundation. Setting small goals in a situation which depends on exponential growth is a guaranteed way of not seeing results very fast. Conversely, putting in a large initial effort is a guaranteed way of seeing immediate and growing returns. The middle of the curve shows a proportional relationship between effort and results--work more and get more results; work less and get fewer results. In other words, this is the stage where extra effort is rewarded more than it was in the beginning, because it's leveraged by the now higher production.

With further effort, the production ceiling starts to kick in due to limits on resources, customers, responsibilities, market size, etc. You might have found yourself with a job description that could be done in three hours a day even though you nominally have to work for eight hours. If so you know what I mean about reaching the productivity ceiling.

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