On Pareto
80/20
For many events, roughly 80% of the effects come from 20% of the causes - Vilfredo Pareto
The 80/20 Principle applied to business has one key theme—to generate the most money with the least expenditure of assets and effort. This accounts for demising returns. But, what is the 80/20 Principle? The 80/20 Principle tells us that in any population, some things are likely to be much more important than others. Some, phrase this as signal vs noise.
A good benchmark or hypothesis is that 80 percent of results or outputs flow from 20 percent of causes, and sometimes from a much smaller proportion of powerful forces. The 80/20 pattern that we have come to recognize for over a century—and which has been remarkably consistent, varying mainly between, say, 70/30 and 90/10—is rapidly increasing to 90/10 and 99/1. Understanding this trend and how to be on the right side of it can change your life. Tell your kids to study statistics.
It is very rarely true that 50 percent of causes lead to 50 percent of results. The universe is predictably unbalanced. Few things really matter. Truly effective people and organizations latch on to the few powerful forces at work in their worlds and turn them to their advantage.
Zipf & Pareto
In 1949 George Zipf discovered the “Principle of Least Effort” which was actually a rediscovery and elaboration of Pareto’s principle. I wonder if he was a fan of the Buddhism… Zipf’s principle said that resources (people, goods, time, skills, or anything else that is productive) tended to arrange themselves so as to minimize work, so that approximately 20–30 percent of any resource accounted for 70–80 percent of the activity related to that resource. There are high achievers amongst us, give them more to do, because they WILL get it done. Management lesson 101.
In 1963, IBM discovered that about 80 percent of a computer’s time is spent executing about 20 percent of the operating code. The company immediately rewrote its operating software to make the most-used 20 percent very accessible and user friendly, thus making IBM computers more efficient and faster than competitors’ machines for the majority of applications.
The reason that the 80/20 Principle is so valuable is that it is counterintuitive. We tend to expect that all causes will have roughly the same significance. That all consumers are equally valuable. That every bit of business, every product, and every dollar of sales revenue is as good as any other. This “50/50 fallacy” is one of the most inaccurate and harmful, as well as the most deeply rooted, of our mental maps.
The 80/20 Principle asserts that when two sets of data, relating to causes and results, can be examined and analyzed, the most likely result is that there will be a pattern of imbalance. The imbalance may be 65/35, 70/30, 75/25, 80/20, 95/5, or 99.9/0.1, or any set of numbers in between. However, the two numbers in the comparison don’t have to add up to 100. The 80/20 Principle also asserts that when we know the true relationship, we are likely to be surprised at how unbalanced it is.
Tipping Point
Related to the idea of feedback loops is the concept of the tipping point. Up to a certain point, a new force—whether it is a new product, a disease, a new rap group, or a new habit such as weight training or rowing—finds it difficult to make headway. A great deal of effort generates little by way of results. At this point many people give up. But if the new force persists and can cross a certain invisible line, a small amount of additional effort can reap huge returns.
This invisible line is the tipping point. The concept comes from the principles of epidemic theory. The tipping point is “the point at which an ordinary and stable phenomenon—a low-level flu outbreak—can turn into a public-health crisis,” because of the number of people who are infected and can therefore infect others. And since the behavior of epidemics is nonlinear and they don’t behave in the way we expect, “small changes—like bringing new infections down to thirty thousand from forty thousand—can have huge effects…It all depends when and how the changes are made.”
Keys
A few things are important; most are not. The common view is that we are short of time. One application of the 80/20 Principle suggests the reverse: that we are actually awash with time and profligate in its abuse.
It is not that we have a short space of time, but that we waste much of it. Life is long enough, and it has been given in sufficiently generous measure to allow the accomplishment of the very greatest things if the whole of it is well invested. But when it is squandered in luxury and carelessness, when it is devoted to no good end, forced at last by the ultimate necessity we perceive that it has passed away before we were aware that it was passing.So it is—the life we receive is not short, but we make it so, nor do we have any lack of it, but are wasteful of it. - Seneca
Conventional wisdom is not to put all your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk. A new and complementary way to use the 80/20 Principle is what I call 80/20 Thinking. This requires deep thought about any issue that is important to you and asks you to make a judgment on whether the 80/20 Principle is working in that area.
Application
Application of the 80/20 Principle implies that we should do the following:
Celebrate exceptional productivity, rather than raise average efforts
Look for the short cut, rather than run the full course
Exercise control over our lives with the least possible effort
Be selective, not exhaustive
Strive for excellence in few things, rather than good performance in many
Delegate or outsource as much as possible in our daily lives and be encouraged rather than penalized by tax systems to do this (use landscapers, car mechanics, maids, and other specialists to the maximum, instead of doing the work ourselves)
Choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves
Only do the thing we are best at doing and enjoy most
Look beneath the normal texture of life to uncover ironies and oddities
In every important sphere, work out where 20 percent of effort can lead to 80 percent of returns
Calm down, work less and target a limited number of very valuable goals where the 80/20 Principle will work for us, rather than pursuing every available opportunity.
Make the most of those few “lucky streaks” in our life where we are at our creative peak and the stars line up to guarantee success.
Costs
Understanding the cost of complexity allows us to take a major leap forward in the debate about corporate size. It is not that small is beautiful. All other things being equal, big is beautiful. But all other things are not equal. Big is only ugly and expensive because it is complex. Big can be beautiful. But it is simple that is always beautiful.
All effective techniques to reduce costs use three 80/20 insights: simplification, through elimination of unprofitable activity; focus, on a few key drivers of improvements; and comparison of performance.
Because business is wasteful at times, and because complexity and waste feed on each other, a simple business will always be better than a complex business. Because scale is normally valuable, for any given level of complexity, it is better to have a larger business. The large and simple business is the best.
The way to create something great is to create something simple. Anyone who is serious about delivering better value to customers can easily do so, by reducing complexity. Any large business is stuffed full of passengers—unprofitable products, processes, suppliers, customers, and, heaviest of all, managers. The passengers obstruct the evolution of commerce. Progress requires simplicity, and simplicity requires ruthlessness. This helps to explain why simple is as rare as it is beautiful.
Profitability is only a scorecard providing an after-the-fact measure of a business’s health. The real measure of a healthy business lies in the strength, depth, and length of its relationship with its core customers. Customer loyalty is the basic fact that drives profitability in any case. So, when something is working well, double and redouble your bets.
If your insights are not unconventional, you are not thinking 80/20. We have been conditioned to think that high ambition must go with thrusting hyperactivity, long hours, ruthlessness, the sacrifice both of self and others to the cause, and extreme busyness. In short, the rat race. We pay dearly for this association of ideas. The combination is neither desirable nor necessary. A much more attractive, and at least equally attainable, combination is that of extreme ambition with confidence, relaxation, and a civilized manner. This is the 80/20 ideal, but it rests on solid empirical foundations. Most great achievements are made through a combination of steady application and sudden insight. The key is not effort, but finding the right thing to achieve.
Benefits
The Top 10 highest-value uses of time
Things that advance your overall purpose in life
Things you have always wanted to do
Things already in the 20/80 relationship of time to results
Innovative ways of doing things that promise to cut the time required and/or multiply the quality of results
Things other people tell you can’t be done
Things other people have done successfully in a different arena
Things that use your own creativity
Things that you can get other people to do for you with relatively little effort on your part
Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively
Things for which it is now or never
When thinking about any potential use of time, ask two questions:
Is it unconventional? •
Does it promise to multiply effectiveness?
It is unlikely to be a good use of time unless the answer to both questions is yes.
It is important to focus on what you find easy. This is where most motivational writers go wrong. They assume you should try things that are difficult for you. The 80/20 Principle is clear. Pursue those few things where you are amazingly better than others and that you enjoy most.
10 rules for career success
Specialize in a very small niche; develop a core skill
Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
Realize that knowledge is power
Identify your market and your core customers and serve them best
Identify where 20 percent of effort gives 80 percent of returns
Learn from the best
Become self-employed early in your career
Employ as many net value creators as possible
Use outside contractors for everything but your core skill
Exploit capital leverage
Obtain four forms of labor leverage
First, leverage your own time.
Second, capture 100 percent of its value by becoming self-employed.
Third, employ as many net value creators as possible.
Fourth, contract out everything that you and your colleagues are not several times better at doing.
Koch’s 10 commandments of investment
Make your investment philosophy reflect your personality
Be proactive and unbalanced
Invest mainly in the stock market
Invest for the long term
Invest most when the market is low
If you can’t beat the market, track it
Build your investments on your expertise
Consider the merits of emerging markets
Cull your loss makers
Run your gains
In conclusion
There is no doubt you have your own pressure points. Write them down now. Consciously engineer your life to avoid them; write down how now. Then check each month how far you are succeeding. Congratulate yourself on each small avoidance victory.
The 80/20 principle is becoming even more prevalent, affecting our lives in mysterious and perplexing ways. Why is that? The answer is in the burgeoning power of networks. The number and influence of networks has been growing for a long time, at first a slow increase over the past few centuries, but since about 1970 the increase has become faster and more dramatic. Networks also behave in an 80/20 way—in the way characteristic of 80/20 distributions. And often in an extremely lopsided way. So, the principle is becoming more pervasive because the same is true of networks. More networks, more 80/20 phenomena.
In keeping with the selective nature of the principle, five potent aspects are apparent:
Only work in networks
Small size, very high growth
Only work for an 80/20 boss - someone who consciously or unconsciously follows the principle
Find your 80/20 idea
Become joyfully, usefully unique
Those who have embraced the 80/20 principle find that the line between work and non-work becomes increasingly blurred. In this sense, the yin and yang of life are re-established. Although there are two apparently opposite dimensions to the 80/20 Principle—efficiency and life enhancement—the dimensions are entirely complementary and interwoven.
The efficiency dimension allows us room for the life-enhancing dimension. The common thread is knowing what gives us the results we want, and knowing what matters. In short, apply the 80/20 thinking into your life, be ruthless about finding what these things are and start increasing your bet sizes.