Unlocking the Secrets of Technological Cost Reduction: Wright's Law Revealed
Remember when even a standard-sized flat-screen television costs several thousand dollars (and could easily cause a trip to the chiropractor after handling)? Did you know the first microwave ovens would set you back between $2,000 and $3,000…in the 1970s? Today, we can purchase a massive smart t.v. with mind-blowing specs for just a few hundred bucks and a countertop microwave for less than fifty dollars. Since we live in a technology-driven society, the speed of innovation is not always apparent. But when we look back, even to recent history, it becomes evident that the pace of technological improvements is swifter than ever and accelerating.
While I’m not a total tech geek, I try to stay abreast of the latest technological trends and innovations, so my clients can access investments in the most disruptive innovations available. Several years ago, during my research, I discovered Cathie Wood, CEO of Ark Invest, a company that seeks to invest in disruptive technologies. After reading Ark's white papers, watching investor presentations, and tracking the performance of their funds, I'm convinced Cathie and her team are well equipped to understand and invest in tech, and much of their analysis is based on Wright's law.
Wright's law is the slightly more flexible sibling to Moore's Law. Moore's law, of course, was the famous model that predicted the number of transistors on a chip would double every 2 years, thus halving the cost to compute.
While Moore's law got off to a good start, it hasn't quite stood the test of time, and that's why Wright's law is more useful. Instead of pegging the rate of improvement to time, Wright's law suggests "the cost of a unit decreases as a function of the cumulative production." In other words, we learn by doing, so with each unit produced, we are gaining the expertise, efficiencies, and scale needed to reduce forward costs.
Even more impressive, Wright's law is older, first developed in 1936 in a paper published by Theodore Wright (Moore's law was introduced in 1965). But wait a minute…computer chips weren't around until 1939. Correct, Mr. Wright's research was aimed at aerospace but has proven relevant across industries and sectors. When observing data on airplane production, Mr. Wright noticed that for every doubling of cumulative units, the cost to produce one unit dropped by 15%. This resulted in the 2,000th unit costing 15% less than the 1,000th and the 4,000th unit 15% cheaper than the 2,000th.
The usefulness of Wright's law lies in its predictive ability. Of course, this only works if there is a demand for the product or technology being produced. No one will continue producing widgets that nobody wants. Wright's law has been paramount as I search for new technologies that have the potential to scale into products or services that people around the world use. For example, Wright's law was invaluable in modeling the price decline of batteries for electric vehicles, thus helping model the future affordability for consumers far and wide.
When growing at scale, the speed of innovation makes for attractive investments (provided other criteria are met), which is why innovation and disruptive technology are well represented in our investment portfolios.
*This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
