Question on exponential growth???

Discussion in 'Economics' started by riddler, May 18, 2010.

  1. riddler


    guys,sorry to sound dumb..
    what does it mean when they say a good traders profits will grow exponentially?
    what does exponential growth mean in laymans terms? i looked it up but still am unclear..i hear that term alot.
  2. It means the equity curve will mimic the well known exponential curve.

    It is common in finance to model compounded returns as exponential.
    If you have a perfect risk free return per period, it grows exponentially, but at a very slow rate (practically speaking).

    I.e. imagine you could get 1% return guaranteed (risk free) per month.
    Starting with $100
    month 1 would be $101
    it would be reinvested into month2
    at $101*(1+.01)=102.1
    If you keep plugging in the numbers recursively, you'll see the curve grows exponentially.

    It's also what you see when you model a random walk (not risk free) with positive drift. The random part is variance or volatility, which traders generally don't want to see (at least negative) as it means risk or uncertainty.

    The more constant drift your curve has, the smoother your equity curve and the more ideally you mimic the exponential curve (think of drift as analogous to the risk free growth metaphor above).

    Hope that helps.

    P.S. not sure this belongs economics, so mods might want to move it to educational resources or a more appropriate thread.
  3. it means it has a multiplier effect. like animals when they breed.

    it is also called the malthusian model. after thomas malthus who said the human population will grow until the factors enabling grow fail.

    in short it will grow rapidly until fundamentals needed are exhausted.
  4. riddler


    is it like compound interest?
  5. As explained earlier, yes!

    It's just another mathematical model that fits it well.
  6. riddler


    can someone give an example in laymans terms what growing exponentially is,specifically from a traders perspective and then another one froma small business perspective..?
    thank you guys
  7. A Ponzi scheme.
  8. loik


  9. the more profits, the more profits.
    you start off with 10k and make 2k,you now have 12k to trade with. you can now make 13k with 12k opposed to 2k with 10k..something like that.
    also compound interest is a good example.
    a sentence. a good trader will increase his profits exponentially.
  10. Pekelo


    Not necessery. But a pyramid scheme where every new member is expected to bring in more new members is a good example. Like Amway...
    #10     May 19, 2010