The Pareto Principle, also known as the 80/20 Rule, and sometimes known as "The Law of the Vital Few and The Useful Many", illustrates that 80% of effects arise from 20% of the causes.
This means that causes of an outcome can be divided into two categories:
In practical terms: 20% of your actions/activities will account for 80% of your results/outcomes.
The Pareto Principle gets its name from the Italian-born economist Vilfredo Pareto (1848-1923), who observed that a relative few people held the majority of the wealth (20%) – back in 1895.
The Pareto Principle is an observation, not a law of nature
80/20 Rule Examples
Steps to apply the 80/20 Rule
How to set goals based on the 80/20 Rule
[1] Identify your key tasks based on your goals
[2] Clarify and unblock
[3] Work smarter
The graph above illustrates and compares the bell curve of standard distribution and the 80/20 curve of power law distribution.
The Bell Curve - Standard Distribution
The Bell Curve is the distribution model that most of us are familiar with and it is fairly accurate way to describe simple systems.
It works
best where the range of variation - the variation from the mean
[average] - is not that great. A good example of this is the height of
people. If we take the average height of a woman as 163 cm or 1.6 meters
or, as expressed in imperial measure, 5 feet 3 inches the range of
variation is going to fall within 91 cm and 213 cm, or 3 feet and 7
feet.
In this standard distribution, the height of most women
will lie in the middle of the bell curve and the height of the smallest
and highest will trail out slightly to each side of the bell.
The 80/20 Curve - Power Law Distribution
However when you are dealing with statistics where the range of variation - the variation from the mean [average] - is large then the 80/20 Curve is the appropriate model.
It is referred to as a "Power Law Distribution". Put simply [as a non statistician I can only only see these things simply]:
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.
A good example of this is income. If we assume the global average annual income per person is $18,000 the range of variation from the average figure is colossal.
Taken at the country level, India has an average per capita income of $1,700 whereas Monaco has an average per capita income of $180,700.
At the individual level the range is extreme. Just for the purpose of this illustration, if we take the lowest individual annual income from India as $1,700 per annum, on the highest end of the income spectrum there are a small number [1%] of individuals making an annual income of $500,000 per annum and even smaller number making over $50million per annum.
The Long Tail
In the graphic above, the long tail is the section to the right coloured green which commences at the point where the Bell Curve intersects the 80/20 curve.
The statistical term long tail is a pattern of distribution that occurs when a larger share of occurrences occur farther away from the mean or average value.
The Fat Tail
In the graphic above, the fat tail is the section coloured yellow to the left of the point where the Bell Curve intersects the 80/20 curve.
The statistical term 'fat tails' refers to probability distributions with relatively high probability of extreme outcomes.
Resource
For a fuller, and relatively easy to read, explanation of the dynamics of Power Laws I recommend Shane Parrish's excellent article:
Power Laws: How Nonlinear Relationships Amplify Results
It's Now The 80/20 Curve That Defines Our Lives
From this point onward in this article I am deeply indebted to Taylor Pearson:
"...as our world grows more complex and interdependent, the bell curve is a worse and worse way of describing the things that matter to us.
It’s now
the 80/20 curve that defines our lives. The statistical term 'fat
tails' refers to probability distributions with relatively high
probability of extreme outcomes.
80/20 is striking to most people because it indicates that the natural order of most systems is not an equal distribution, but an unequal distribution: only 20% of customers account for 80% of revenue."
However, the disparities are even larger than most people think.
The really striking part is just how concentrated the “fat tail” of the curve is.
Jesus Marketing [Taylor Pearson]
Why is the Fat Tail so concentrated?
Because the 80/20 is fractal, meaning it can be applied to itself.
If 20% of people own 80% of the land, we can then take the 80/20 of that new 20%. In that case, 4% of people would own 64% of the land.
If we then took the 80/20 of that, then 0.8% of people own 51.2% of the land.
That’s really concentrated! And this is true everywhere.
Almost everyone systematically under-allocates resources to the fat tailsWe tend to spend most of our time and energy thinking about the middle, because we see the world through a bell curve lens, and most of the area in a bell curve is in the middle. But in reality, we live in an 80/20 world.
The Top 1% Of Fat Tails Account For 50% Of The Results
Focus on depth, not breadth
Taylor Pearson says:
"A good rule of thumb for identifying the fat tail in any given system is to think about how to go deep, not wide.
A
key reason why all the margin is in the fat tails is because there is
no clear cause and effect. The fat tails are profitable in part because
they are hard to directly attribute.
It’s almost impossible to measure depth, but easy to measure breadth.
In relationships, the number of Facebook friends you have is easy to measure, but that number is a horrible metric of anything meaningful. You can have tons of FB friends and feel terribly lonely. Most people do.
In marketing, it’s easy to measure how many contacts are in your database, but hard to measure how much the top 1% are worth.
In books, it’s easy to measure how many books you’ve read, but really hard to measure how much a book impacted your thinking."
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.
Resources
Taylor Pearson:
4 Strategies To Find The Work Only You Can Do (And Why It’s More Profitable Than Ever)
Further Reading: Applying The Fat Tail Fractal Factor
Return from "Pareto Principle" to: Mental Models
- What if everything we think…