The Fat Tail Fractal Factor

Learn How To Benefit From The Fat Tail Fractal Factor

Less than 1% of your efforts and resources can deliver over 50% of your results

Introducing the Fat Tail Fractal Factor

One of the pleasures of writing material for this site is that I get to research subjects that are new to me. The mental models section falls into this category. I have gained many new insights from this research and the area that I have found most instructive can be broadly categorized as chance, probability and statistics.

For a non-statistically trained lay person such as myself, this has introduced a whole new dimension to my understanding of life and has added more tools to my balanced toolkit.

In layman's terms - what exactly is the fat tail fractal factor?

We are all familiar with the 80/20 rule [also know as the Pareto Principal] which basically means that as a general observation 80% of your results come from 20% of your efforts. So the take away with this is to focus your time, energy and resources on that productive 20% to maximise your results.

What you may not know, and I certainly didn't, is that that the 80/20 rule can be applied to itself - that's what the fractal factor means.

So 20% of your 20% best efforts [i.e. 4%] will deliver 64% of your best results. This is illustrated in the second line of the graphic above.

And the 80/20 rule can be applied to this 4% so 20% of that 4% [i.e. 0.8%] will deliver 51.2% of your best results. This illustrated in the third line of the graphic above.

So in very simple terms this means that:

1% of your efforts and resources can deliver 50% of your results!

The challenge lies in finding that key subset of your productive 20%.

In this article I want to share some insights I gained from learning how to apply the fat tail fractal factor and find that elusive 1%. But first, an anecdote:

My first experience of the fat tail fractal factor

Early in my career as a salesman I worked for the marketing services division of the credit reporting agency Dun & Bradstreet. My sales target was £10,000 per month and over the first 6 months I consistently managed to achieve target.

My average order value was about £1,000 and this involved a huge amount of cold-calling and about 1,000 miles of driving every week to achieve the 10 orders to make my sales target.

I realised that there had to be a more efficient way of working as there was no way I could maintain that workload over the long term, so I decided to aim for one order worth £10,000 per month.

Although I had never heard of the 80/20 rule, that is exactly what I applied. I thought carefully about the type of client that had a big enough requirement to order in that quantity. I figured out that this had to be a client who had a requirement for added value services, so in addition to selling the raw data I decided to sell the additional services required to fulfill a direct mail or telesales campaign.

The following month I smashed my target with an order for £10,000 and then repeated that success the following month.

As I basked in the warm glow of this early success it occurred to me that the only difference between a £10,000 order and a £100,000 order was an extra zero. So all I had to do was figure out what type of client could place an order of that size.

Further analysis revealed that if I could create a bespoke lead generation service for one of the major financial services companies who employed thousands of salesmen trying to sell pension schemes to small business owners then I could achieve this. Whilst I was obviously unaware of it at the time I was then applying the fat tail fractal factor.

Fast forward another two months and I had approached the regional director of one of these financial services companies and secured an order for £100,000. This covered most of my annual sales target, and I then repeated this process on a smaller scale with a couple of other clients and I closed that financial year on sales of £250,000.

The effect of that first big sale was totally disproportionate to the effort I expended on winning it:

• Achieved the largest single order that had ever been achieved in that division.
• Became top salesman of that year.
• Promoted to Business Development Manager
• Earned £40,000 in commission which adjusted for inflation is £200,000 [or $265,000 USD].

2 Key Ideas That Underpin the Fat Tail Fractal Factor

[1] The Power Law

A power law describes a relationship between two things in which a change in one thing can lead to a large change in the other, regardless of the initial quantities.

Statistically it also describes a range of variations from the mean that can be very large.

[2] The Fat Tail

The  fat tail is the 80% of result that comes from the 20% of effort.

Statistically, there is  a relatively high probability of extreme outcomes in the fat tail.

Clearly the fat tail is where all the serious action is, and the fat tail fractal factor describes the scenario where the effort applied to the critical 1% will yield a massive return that is totally disproportionate to effort invested.

How To Find That Critical 1%

As you focus on the top 20%, you know that somewhere in amongst that group is a subset - which may be just one or two individuals - who will deliver over 50% of your results.

Here are 5 practical tips that I have used, and continue to use, to find that critical 1%:

[1] Focus on Quality Not Quantity

• This is all about focusing on depth, not breadth.
• Do less, and do what you do better.
• Adopt the craftsman mindset.
• Become so good, at whatever it so that you do, that they can't ignore you.

[2] Attract Luck - Be The Best At What You Do

• Build a unique character, a unique brand, a unique mindset, which causes luck to find you.
• While you can’t control  luck, you can influence it and you can attract it by committing to being the best at what you do.

[3] Hunt With A Rifle Not A Shotgun

• Adopt the sniper mentality and focus intently on one target at time.
• This is not the time or place for the broad focus of the shot gun - this is about precision targeting.

[4] Accept the Failure Rate

• Investing more in fat tails means being wrong a lot more, and perhaps this is why the most successful people often say they made a lot of mistakes.
• They made a lot of fat tail investments, most didn’t pay off, but the ones that did make all the difference.

[5] Play The Long Game

• Have a long term goal and take the necessary steps now to set yourself up for long term success.
• Ask hard questions and consider the second-order consequences of your decisions and the key question you will be asking is: "...and then what?"
• Be prepared to sacrifice short-term gains for long-term wins.
• Be prepared to make a lot of mistakes and errors and on occasions be prepared to look stupid.
  

Closing Reflections

The fat tail fractal factor is not just about business and money. This is applies to relationships, hobbies, and areas of special interest to you.

If you can master the dynamics of making this happen you can take a quantum leap in your personal effectiveness, in any area of life that really matters to you, and make a big difference in the lives of others.

Further Reading:

The Pareto Principle - the 80/20 Rule

Why Understanding Ergodicity Is Critical To Your Long Term Survival

How Positive Asymmetry Can Transform Your Life

How To Benefit From The Unseen Margins

Finding Signal In The Noise

Next Article: Dunbar's Number

Return from the "Fat Tail Fractal Factor"

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