The Lindy Effect & Bitcoin
|Oct 7|| 1|
Disclaimer: This is not intended to be an advisory post on Bitcoin investments. This is meant purely for exploring this mental model through the Bitcoin example and it should not be taken as financial advice. If you do something based on what is shared here, you accept complete risk for it and this newsletter or anyone associated with it is not responsible for your actions and its consequences.
Imagine yourself at a bookstore, trying to pick up a book about long-term investing.
You have 2 options in front of you - one of them is a book released 3 years back which was a NYT Bestseller and the other “The Intelligent Investor” by Benjamin Graham written in 1949.
Now, if you had to predict, which book do you think will have investment ideas that are more likely to stand the test of time? If you are like most reasonable people, you would likely pick Benjamin Graham’s 1949 classic.
This choice plays into an idea/risk heuristic model called the Lindy Effect.
What is the Lindy Effect?
The Lindy effect states that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.
In other words, the longer certain things survive, the more likely they will survive well into the future and vice-versa. The idea was made popular in the book “Anti-fragile: Things That Gain from Disorder” by Nassim Nicholas Taleb.
When you are considering ideas that might still be popular in the future, start by looking at the ability/track record of that idea/technology to survive adverse circumstances for a long period of time.
It is also important to understand that the Lindy Effect is a risk aversion heuristic, so it might not be ideal for evaluating social concepts like oppression, glorification etc.
Bitcoin & The Lindy Effect
Crypto has been hot for the last 6 years and Bitcoin has been the most popular crypto currency in the market. Since the creation of the first Bitcoin Genesis Block in January 2009, the currency has come a long way and has seen a lot of ups and downs.
On the way to 2020, Bitcoin has faced and survived numerous obstacles ranging from software threats to human threats. Now in its 11th year, it has withstood scrutiny and market traps to emerge as the most likely winner in the crypto market.
Today, there are thousands of crypto currencies out there and many of them have barely survived the first couple of years.
So based on the Lindy Effect, it is likely that since Bitcoin has survived so many threats for so long, it is probably going to survive threats of similar nature well into the future. Ergo, it might be much more reliable than a cryptocurrency that has been created recently.
However, this doesn’t mean that the likelihood of Bitcoin failing in the next few years is zero or that a new cryptocurrency will not take over Bitcoin as the most popular crypto. This effect is only a probability assessment tool, not a definitive predictor.
Pitfalls & Exceptions
Like any other mental model, the Lindy effect is not air tight and hence it is important to combine it with other mental models and constantly re-assess the combination’s effectiveness. The Lindy Effect is primarily for risk aversion, so use it to avoid taking on high-levels of risk as opposed to actively taking up perceived low risk ventures.
You can get the most out of this model if you looked at it as a probability tool rather than a definitive prediction tool.
Also understand that there are always going to be exceptions, so take multiple factors into account before zeroing on a decision.
Now that you know about the Lindy Effect, in what domains do you think you can be applied to? Let me know by replying to this email.
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Thanks for reading & keep it rational.
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