The average life expectancy in India today is 70 years - implying that, on average, children born today would survive for 70 years.
However, the life expectancy of someone who is 35 years old is ~44 additional years, and that of someone who is 70 years old is ~12 additional years (link to source) . In general as we age, the number of years we are ‘expected’ to live reduces. We are perishable.
In contrast to us, who come with an expiry date, there are things whose life expectancy increases as they age - the non-perishable kind - books, businesses, ideas, behaviors, technologies and so on. For instance, a book which has been selling well for the past 50+ years (e.g., The Intelligent Investor) will have a much higher probability to survive another 50+ years and do well as compared to this year's bestsellers. Major religions (whether or not you believe in them) have survived for thousands of years, and will, in all likelihood, survive for another thousand years. Colgate-Palmolive, which has survived over a century, has a higher chance of surviving for another century. Bitcoin? I'm not so sure.
This brings us to what is called as the Lindy Effect.
The Lindy Effect
In the 1960s, Lindy’s Deli was a café frequented by Broadway artists, comedians and other entertainers where they would discuss the latest developments in the trade and analyze the theater business. One of their observations on the comedy business was that, given the limited material available with comedians, the life expectancy of a television comedian is proportional to the total amount of his exposure on that medium.
This is what the American historian Albert Gouldman termed as ‘Lindy’s Law’. This was later adapted by the mathematician Benoit Mandelbrot as the Lindy Effect, and popularized by Taleb in his book Antifragile: Things that gain from disorder. Taleb describes the Lindy Effect as:
For the perishable, every extra day in his life translates into a shorter additional life expectancy. For the non-perishable, every extra day could imply a longer life expectancy.
If something (non-perishable) has survived the test of time, it should have some inherent property to weather external stimuli and shocks it faces over its life, some quality which makes it robust, some utility which meets some need - and it is likely that the same properties and qualities would further enable its survival for an equally long period in the future. For example, the concept of a ‘wagon on wheels’ - whether in the form of a chariot or carriage or a car, has existed for thousands of years because it meets these criteria and can be expected to continue for several millennia in the future as well. A business which has weathered several shocks in the form of recessions, changes in government regimes, political unrest etc. would emerge stronger enabling itself to survive these shocks in the future as well. This, is the Lindy Effect in action.
Corpernicus meets Gott meets Lindy
Before Copernicus, there was the Aristotelian model of the universe, with Earth as its center. Copernicus asserted that the earth is not the center of the universe. He pointed out that just because ‘we’ are observing the universe, it would be incorrect to assume that we are in a ’special place’, and much more likely that our location in the universe is ‘non-special’. It is in fact so non-special that if we were to take a printed page of the galaxy (or even a part of it), with the numerous stars contained in it, I am willing to bet that odds of us picking the right solar system (forget about the right planet) is lower than one in a billion. This realization of the non-special location of the observer is called as the Copernican Principle.
Richard Gott, an American astrophysicist, translated the Copernican principle from the space domain into the time domain. He was in Europe in 1969 and visited the Berlin Wall, which was 8 years old then. Standing there, he wondered as to how long the wall would last. Was it a permanent fixture or just a temporary aberration? He then argued that there was nothing special about the timing of his visit to Berlin. It was random in time. Therefore it could be at any point in time of the life of the wall - either at the beginning (if the wall were to survive for centuries) or at the end (if the wall were to be demolished the very next day). Given this, if you divide the wall’s life into 4 quarters, he thought there was a 50% chance that he visited the wall in the 2nd and the 3rd quarter. And hence, he could say with 50% certainty that the wall would survive for a a further period between 1/3rd of 8 years (2.7 years) and 3 times 8 years (24 years). Therefore, in the absence of any other information (such as a plan to demolish the wall), his expected (average) remaining life of the wall was - 8 more years - pretty much was what the Lindy effect predicts - and this reasoning is potentially the very basis of the effect.
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Applications of Lindy in life
The Lindy Effect is not an immutable law of nature like gravity. It is more of a heuristic, to add to our library of mental models which help us navigate the world better. It is applicable / relevant in a large number of domains, and that makes this a powerful mental model.
Technology: Imagine you are in the year 2122 as against 2022. Would your smartphone still look like the brick with a screen with icons in it, as it does today? I can say with quite some certainty that it won't. On the other hand, a wheel which has existed for thousands of years, most certainly will continue to exist.
Behavior: Market cycles created when they are oversold due to fear and overbought due to greed, which have been a feature ever since markets existed will continue to exist - given these behaviors are deep rooted in the human physiology. Fads, on the other hand, such as selfies with pouty lips, will be short lived.
Books / texts: Most of the current New York Times Bestsellers are going to be long forgotten (as mentioned earlier in this article too). While books which have stood the test of time - for instance, The Origin of Species by Charles Darwin, or The Wealth of Nations by Adam Smith - will continue to be influential long into the future.
Store of Value: Gold has served as a store of value for millennia. Fiat currencies have served the public and governments over centuries. It is really really unlikely that Bitcoin or some other cryptocurrency will replace either.
Manmade items: The pyramid of Giza, which has stood tall over 4,500+ years will most likely outlast most of our modern buildings. The Taj Mahal built about 400 years back, may survive many of our newer buildings, but still may not outlast the Pyramids.
Investing: The Tata group and some of its companies have lasted over a 100 years. Their products have formed a part of our daily vocabulary, and it is very likely that they will continue to survive for another 100 years. While, the survival rate of startups is really really small. In investing, especially when we are dealing with a lot of unknowns and a lot of uncertainty, we may be better off (from a capital preservation / risk management perspective) going with a company which has survived and thrived over a long period of time as against a recent startup or an IPO with a smaller legacy of survival.
If we look at the top shareholdings of Warren Buffett (Berkshire Hathaway), most of them have over a 100 year history (with one exception - with a ~45 year history):
Bank of America - established in 1904, while parts of it trace back to as far as 249 years.
Chevron Corp. - established in 1879 with a history of over 140 years
Coca-Cola - selling sugary drinks for over 120 years since1892
American Express - going strong since 1850
Occidental Petroleum - since 1920
Kraft Heinz - since 1909 (for Kraft Inc. which was the initial investment, which soun off a part merging with Heinz in 2015)
Apple Inc. - Which currently is the largest shareholding of Berkshire Hathaway is the aberration in the list with a life closer to 50 than to 100
Buffett’s portfolio is Lindy proof. In fact, here’s what Warren Buffett states as his criteria for selecting stocks:
We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business: (1) favorable long-term economic characteristics; (2) competent and honest management; (3) purchase price attractive when measured against the yardstick of value to a private owner; and (4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.”
As you can see there is an emphasis on the ‘long term’ economic characteristics and the familiarity with an industry where you can judge the long term business characteristics.
Another point to consider is on valuing companies - going by first principles, the value of a company is the discounted cash flows it gives back to its owners. And the longer the duration for which it is expected to survive and return cash at a rate higher than the cost of capital, the higher it should be valued. It is only ironical then, that we value so many new age startups with little or no history to show for and a high probability of failure with the craziest multiples on Sales (because they don't have earnings to multiply). By no means am I implying that one cannot find good investments to make good returns here, it is simply that if something new seems crazily valued, it probably is.
A word of caution
As mentioned earlier, the Lindy Effect is not a law of nature, but a heuristic to add to our toolbox of mental models to navigate this complex world. It is most applicable when there is little or no information available to take a decision (e.g., how long will the Berlin Wall survive?), or when there is ambiguity (e.g., which diet works - paleo vs. Atkins vs. GM - it may be best to eat what your great grandparents ate.). It would be foolish to bet on something you know (with a good degree of certainty) is going to fail, just because it is a 100 years old.
In fact, everything in the relatively non-perishable domain will eventually fail, and that will always be a surprise (one day the Pyramids of Giza will fall, and that could be even this year). But in the absence of relevant information, the expected life of these non-perishables is as long as they have already survived (or proportional to it).
May you live life the Lindy way! 🖖
What's your take on the Lindy Effect? How would you apply it in life and in investing? Let’s hear about it in the comments.
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