I was reading this article by James Clear and it brought back memories of when I first heard of the Pareto Principle. It was in my first job at Cipla that I heard of the Pareto Principle and I have used it extensively since.
What is the Pareto Principle ?
A small number of things account for the majority of the results. It extends to other areas too, Majority of the rewards will accrue to a small percentage of people. Its also known as the 80/20 Rule.
This article explores the Pareto Principle in more detail and it says that the winner is separated from the second position by a tiny margin. An important statement from the article is “Small differences in performance can lead to very unequal distributions when repeated over time.”
A short summary of the article –
- Inequality, Everywhere – Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world’s wealth. In 2015, one search engine, Google, received 64 percent of search queries.
- The power of Accumulative Advantage – The author takes the example of the Amazon rainforest where 227 species of “hyper dominant” trees make up nearly half the forest. If two plants grow side by side under the same conditions, they compete for the resources and if one of them grows a little taller, it catches more Sunlight, uses more of the water etc. Slowly it outgrows the other plant. Scientists have given the name of “Accumulative Advantage” to this phenomenon. What begins as a small advantage gets bigger over time. This is seen in investments as the compounding effect… a small investment keeps growing over a period of time as you re-invest the interest, bonus etc.
- Winner-Take-All Effects – Like plants in the rainforest, humans are often competing for the same resources. Several hundreds apply for a job, but one candidate makes it. Politicians fight for the same votes, but one becomes the President/Prime Minister. These situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects. They typically occur in situations that involve relative comparison, where your performance relative to those around you is the determining factor in your success.
- Winner-Take-All Leads to Winner-Take-Most – This basically means that the winner builds on his/her lead and more benefits accrue to them. If a book becomes a best seller, publishers are keen to work with the author again and put more money into marketing etc, so the next book becomes an even bigger best seller. Over time, those that are slightly better end up with the majority of the rewards. Those that are slightly worse end up with next to nothing.
- The 1 percent rule – The author says all of the above happens due to the 1 percent rule. The 1 Percent Rule states that over time the majority of the rewards in a given field will accumulate to the people, teams, and organizations that maintain a 1 percent advantage over the alternatives. You don’t need to be twice as good to get twice the results.
Read the full article to understand the 1 Percent Rule better and use it effectively – James Clear – The 1-Percent Rule
Categories: Corporate Musings