Virtuous & Vicious Loops are basically, ‘nothing succeeds like success and nothing fails like failure’ effects. They are correlated progressions in complex systems where small agents interact, form a chain of events that reinforce themselves through a feedback loop. They are mirror images in effect – virtuous loop dealing in positive effects vs vicious loops dealing in negative effects. They are emergent phenomena where small deeds snowball into bigger ones and create larger effects or opportunities or threats. Such feedback loops defy the tendency of systems to revert to the mean, as small effects reinforce and compound in a specific direction.
Some mathematical manifestations of this concept are the concepts like the Internal Rate of Return (IRR) or compounding with the implicit assumption of reinvestment of inflows. The feedback from the agents is like the inflows, which are reinforced back into the system causing it to grow exponentially.
What causes these loops?
In other words, what causes this reversion to mean defying phenomena? The next section attempts to explain with a very useful analogy.
The Ratchet & Pinion Effect
First, what is Ratchet & Pinion? It is a mechanical device consisting of a wheel with angular teeth in which a cog engages allowing motion of the wheel in one direction only, locking it, if it tries to move the other way.
This is a locking mechanism. It locks your success or failure at certain levels providing an evolutionary irreversibility. It is at these ratchet points that the success (or failure) gets locked in. The ratchet points are a sort of Evolutionary stable state, where the system, if falls back, can rest upon or take support.
Progressive evolution may be not so much a steady upward climb as a series of discrete steps from stable plateau to stable plateau.
– Richard Dawkins, The Selfish Gene
This is a locking mechanism. It locks your success or failure at certain levels providing an evolutionary irreversibility. It is at these ratchet points that the success (or failure) gets locked in. The ratchet points are a sort of Evolutionary stable state, where the system, if falls back, can rest upon or take support.
It’s a bit like the trad gear that mountaineers use to anchor a rope in the rock. If the mountaineer slips & falls, he gets support at the last anchor. That anchor is the worst case fall for him. It locks his failure at that level, from which he can only go higher!
I have posted a Twitter Chain on the Ratchet & Pinion Effect.
At these ratchet points, platforms are built, on which reinforcements are applied based on feedback, thereby bringing incremental success (or failure). Such correlated progression creates an exponential success (or failure) curve, where subsequent success builds on the locked-in success (or failure) so far, at an accelerated pace. The progression is not additive, it is exponential. This effect creates the Virtuous & Vicious Feedback loops.
As can be seen from these hand drawn charts, the exponential green curve on the left manifests out of the virtual feedback loop that gets generated as each success, gets locked in, creating fresh opportunities and further reinforcements take the curve higher at a slope steeper than ever before. The opposite of this manifests in the right curve, where each failure ensnares you in a vicious web of disasters, such that the failure gets locked-in at every stage that leads to a precipitous irreversible fall.
All forms of successes & failures undergo this phenomenon. Success appears to come first slowly, then suddenly as linear inputs compound over several iterations of feedback loops and compounds.
There are species, people, societies, businesses, technologies, cults, faiths, religions, careers, fame, wealth, health & fitness, relationships, confidence, timidity, prosperity, creativity, discoveries & inventions, viruses, networks and countries that get ensnared in such loops.
In due course of time, such cumulative effects cause a disparity between the haves & have nots, the successful & the unsuccessful, the right tail of the distribution curve and the left tail. This disparity can be pictorially comprehended as a K-Curve.
The K-Curve
The K-Curve is a pictorial representation of how the virtuous & vicious loops end up creating disparity between the successful and failed systems. This K-Curve can be observed in all the domains mentioned above –
- socio-economic disparity
- the hegemony of powerful countries vs the desperation of the third world
- the rise & fall of religions, faiths & cults
- the rise & ruin of nations & economies
- the rise & fall of technologies, businesses & careers
- hypertrophy & atrophy of muscles
- The fortunes of the Ambani brothers
- The Financial status of financially prudent & financially profligate people
The disparity develops first gradually then suddenly. The disparity is much more in what Nassim Taleb calls extremistan – domains where luck & leeway play large roles. Eg: art, sports, financial markets, wealth (rich & poor), networks. The disparity is reasonably muted in domains, which Taleb calls mediocristan – domains where luck & leeway play smaller roles.
Some Inferences
Direction of roll
Watch out for direction where you’re rolling. 2nd Law of Thermodynamics states that a system left on its own drifts into higher entropy. Something similar happens to complex systems. The fall, down the vicious loops, happens on its own. It’s almost as if a system is capable of falling into a precipice out of its own weight.
- Inflation eats into your savings and makes you poorer.
- Youth without direction, degenerates into chaos and unruliness
- Working Capital Management in a business, if left unchecked becomes inefficient
- Career tumbles, if you stagnate or satisfied and don’t keep upgrading your skills
- Relationships can’t be taken for granted; need a regular dose of attention & care
- Muscles get weaker if not used.
On the other hand, to board a virtuous cycle and stay on board, requires persistent effort…reinforcement beyond every ratchet point. Virtuous loops do have an inclination to go higher, but they need regular reinforcements.
- Regular transfer of savings into investments in growing assets to beat inflation
- Youth need direction and opportunities to harness their talent & energy
- All the slack from working capital has to be tightened regularly
- Skills need regular upgradation to retain employability
- Relationships can’t be taken for granted and deserve & demand attention & care
- Regular exercises makes muscles stronger
You need to keep an eye on the ball and see which side it is rolling and ensure it rolls in the right direction.
Reinforcements
The long term success is not one big move; it is a cumulative causation of a series of small successes. These small successes are the reinforcements which we discussed in the Ratchet & Pinion effects. At each ratchet point, during a journey, we need reinforcements.
Big success in life is the result of a series of small successes all linked together over time.
– Mark Minervini
Habits
Habits are one of the best examples of such reinforcements. Habits are persistence in practice. The life that you’ll live tomorrow is the result of habits you have today.
Here’s the thing..
Life is vicious or virtuous in a non-linear way. Over a period of time, the non-linearities manifest themselves into disparities that grow like a K-Curve, first slowly then quickly. It helps, if you keep an eye on which side of the K, your graph is rolling and take pre-emptive, constructive actions!