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Grahamites
Grahamites
Articles (328) 

Dealing With the Acceleration of Knowledge Decay

How to cope with the shorter half-life of knowledge in business

July 15, 2019 | About:

Today I bumped into a super interesting article regarding an engineer’s half-life of knowledge. While the article itself is worth reading repeatedly, the most interesting part is the following:

"An engineer’s 'half-life of knowledge,' an expression coined in 1962 by economist Fritz Machlup to describe the time it takes for half the knowledge in a particular domain to be superseded, everyone seems to agree, has been steadily dropping. For instance, a 1966 story in IEEE Spectrum titled, 'Technical Obsolescence,' postulated that the half-life of an engineering degree in the late 1920’s was about 35 years; for a degree from 1960, it was thought to be about a decade.

"Thomas Jones, then an IEEE Fellow and President of the University of South Carolina wrote a paper in 1966 for the IEEE Transactions on Aerospace and Electronic Systems titled, 'The Dollars and Cents of Continuing Education,' in which he agreed with the 10 year half-life estimate. Jones went on to roughly calculate what effort it would take for a working engineer to remain current in his or her field.

"Jones emphasized in his article that, 'Life-long learning of engineering is possible only by disciplined life-long study and thought.' Over a 40 year engineering career, a person would need to spend 9600 hours in study to remain current, or the time needed to earn two undergraduate degrees.

"Jones hinted in his paper about the continuing issue of accelerating 'knowledge decay,' which can be seen rising again as an issue in a 1991 New York Times article, 'Engineer Supply Affects America.' The Times article cites the IEEE as a source when it reported that the half-life of engineering skills at that time was now estimated to be less than 5 years, and for a software engineer, it was less than three. A few years later in 1996, Craig Barrett, president and co-founder of Intel, lent credence to that belief when he stated, 'The half-life of an engineer, software or hardware, is only a few years.' In 2002, William Wulf, the president of the National Academy of Engineering, was quoted as saying that,' The half-life of engineering knowledge … is from seven to 2½ years.' More recent estimates emphasize the low end of the range, especially for those working in IT."

I’m slightly skeptical about the study. For instance, take mathematics, which is an essential subject every engineer has to master. I’m not aware of the fundamental changes in calculus and arithmetic. But for the sake of discussion, let’s say the study is in large part valid.

I wasn’t smart enough to study engineer myself in college and graduate school. After reading the above study, I’m a bit relieved that I wasn’t smart enough to be an engineer. It would be painful to know that it only takes a few years for half of the knowledge accumulated to become obsolete.

But wait, is the half-life of knowledge in the investment world getting shorter as well? And if so, what does it mean?

In an article I wrote earlier this month, I quoted two changes that were attributed to the underperformance of classic value investors, observed by an AB Bernstein analyst.

  • Most important growth assets are intangible, which in many cases are not captured in book value and retained earnings, making the usefulness of book value and earnings questionable.
  • Technology has disrupted industries in a way that may permanently destroy “moats” that used to exist around certain industries, making mean-reversion less likely to hold.

Both changes are indicative of the accelerating “knowledge decay” and thus, the shortening of half-life of knowledge in the business and investment world. This has huge implications, and I don’t think enough investors have thought about it hard enough.

For instance, many investors today focus only on the technology sector, which arguably has the fastest “knowledge decay” rate and the shortest half-life of knowledge. It might have been fun the past decade or two when there was a huge tailwind, but how can you compound your knowledge if it becomes obsoletes every few months, or in some niche areas, every few weeks?

On the other hand, with traditional industries, the rate of “knowledge decay” is arguably much slower than in the technology sector. But it still accelerated from the 1960s, 1970s, 1980s and 1990s. Today the half-life of knowledge in traditional industries like food and beverage is undoubtedly getting shorter and shorter. Kraft Heinz (NASDAQ:KHC) is a great example of what could happen if you underestimated the change.

To deal with the half-life of knowledge issue, investors can do a few things:

  1. Spend more time on industries in which the half-life of knowledge is longer so that knowledge can more easily compound.
  2. Conversely, be aware of the possibility that focusing on the sexiest industries may bring short-term benefits, but it may lead one overlook the potential long-term consequence of knowledge decay.
  3. Acknowledge the acceleration of knowledge decay and shortening of the half-life of knowledge in general in the business world and deal with it. This may require us to spend more time learning about the ongoing changes in the world around us and be more open minded about the possibilities. But if Buffett and Munger are doing this in their late 80s and mid-90s, we really don’t have any excuses not to follow their lead.

Read more here: 

Blind Spots in Investing 

Charlie Munger Calculated Wesco's Intrinsic Value 

Value Investing Might Be Dead? 

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About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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