1 percent rule based on Pareto theory

Once at the end of the 19th century (no one reliably remembers), Wilfredo Pareto made a small but amazing discovery during the trouble in the garden.

Pareto noticed that a small number of pea seeds in his garden produced the bulk of the crop. Pareto was a man with a mathematical mindset and worked as an economist, and after himself left a legacy that turned the economy into a real science, based on quantifiable indicators, numbers and facts.

Unlike most modern economists, Pareto wrote books and articles overflowing with formulas. But it was the work with garden peas that led him to the thought: what if such a heterogeneous distribution is valid in all areas of life.

Pareto principle.

In those years, Pareto studied the welfare of different nations. Since he himself was Italian, Italy became the first country to analyze the distribution of goods and resources. With amazement, Wilfredo learned that 80% of the Italian territories are in the possession of 20% of the population. Like the situation of peas in his garden, most resources were controlled and exploited by a minority of participants..

Pareto continued his analytical experiments with other states and discovered a pattern. So, for example, after processing English income tax reports, it turned out that about 30% of people in the United Kingdom have about 70% of total income.

As research continued, Wilfredo Pareto found that the numbers rarely turned out to be exactly the same, but the main trend continued. Most income (resources, rewards, etc.) always belongs to fewer people..

A pattern in which a small number of actions gives the bulk of the results has gained fame as the Pareto Principle, or, as it is often referred to, the 80/20 rule.

Inequality is everywhere.

For decades to come, the discovery of Pareto was perceived by economists as a gospel. When he showed the world this simple and undeniable regularity, everyone found confirmation of the Paret Principle in absolutely all areas. And today the 80/20 rule remains relevant and is proved by a mass of examples..

For example, before the 2015-2016 season in the NBA, 20% of teams won 75.3% of the championships. In addition, only two teams – the Boston Celtics and Los Angeles Lakers – won almost half of all competitions held during the existence of the National Basketball Association. Just like Pareto peas, a minority of clubs take the most rewards..

Even more amazing numbers are in football. While 77 countries took part in the history of world championships, 3 national teams (Brazil, Italy, Germany) won 65% of the FIFA World Cups.

Situations confirming the principle are found in any field: from real estate to the distribution of wealth and the technology market. In the 1950s, 3% of Guatemalans owned 70% of the land in the country. In 2013, 8.4% of the world’s people controlled 83.3% of the world’s wealth. In 2015, the share of the main Internet search engine – Google – accounted for 64% of requests worldwide.

Why is this happening?

Why do some people, groups, and companies own most resources, wealth, and money? To answer this question, we give an example from nature.

Strength of cumulative advantage.

Forests spanning the Amazon basin are one of the most diverse ecological systems on our planet. For all time, scientists have discovered about 16,000 species of trees on their territory. But with such an amazing variety, experts found that almost half of the rainforest is composed of 227 dominant species. That is, 50% of the trees in the Amazon represented 1.4% of all possible species.

Why is this so?

Let’s imagine that two plants grow in close proximity to each other. Every day they fight for sunlight and nutrients from the air or soil. If one plant grows slightly taller, it absorbs more light, absorbs moisture and grows faster. Every day, the advantage gained is growing and allows the plant to further oppress its neighbor. This picture is observed until the established leadership does not lead to the crowding out of the second plant. As a result, one plant receives the majority of sunlight, nutrients and covers a large area. Domination develops the advantage further – the plant receives better conditions for the reproduction and distribution of seeds. Biological superiority lasts from generation to generation until the fittest plants dominate the entire forest.

Scientists call this pattern a cumulative advantage.

One who has a slight advantage in the beginning makes it more and more over time.

A small plant has a small competitive advantage to displace biological rivals and take over the forest.

Effect “Winner takes everything”.

Things similar to the example with plants are constantly happening in our lives. Like trees in a rainforest, people fight for the benefits necessary to achieve goals and improve lives..

– Politicians compete for the same voters.
– Writers and artists strive for a high position on bestseller lists and charts.
– Athletes compete for one medal.
– Companies are trying to attract the same audience
– TV shows wage a desperate war for an hour of your attention.

Imagine two swimmers participating in the Olympics. One of them will receive a gold medal, even if her leadership at the finish is one thousandth of a second. A potential client considers offers from 10 companies, but eventually selects one. You have to be better than all rivals to get a jackpot.

Or, say, you are applying for a position that is also attractive to 200 candidates. One must be the best among them all in order to take the desired position..

Situations in which small differences in executive skills lead to a huge difference in remuneration are called the “Winner takes all” effect..

It is usually found in situations in which the qualities and advantages of a participant in events are considered in comparison with competitors.

Not all spheres of life are based on the principle of “The winner takes everything”, but each is related to it to one degree or another. A decision that involves the use of a resource limit (for example, time or money), for natural reasons, gives rise to the situation “The winner takes everything”.

In situations like these, one can be minimally better than the other in order to receive a greater reward than usual. If you surpass your opponent by 1%, 1 second or $ 1, you get 100% victory. Plus, owning a small advantage over an opponent is precisely getting all the winnings. There is only one winner, everyone else is content with nothing.

The principle “Winner takes more” follows from the principle “Winner takes everything”.

The “Winner takes everything” effect works when considering particular situations, and, over time, transforms into “Winner takes more”.

Having taken an advantageous position once – having won a gold medal, cashed money in a bank or taken a chair in the Oval Office – the winner begins the process of accumulating advantages, the possession of which facilitates subsequent victories. This ensures the rule 80/20.

If one road is more convenient than another, more drivers and pedestrians use it. Due to the busy traffic, various enterprises appear near it, houses are being built. Developed infrastructure gives people even more advantages of using the road. Such a chain of sequences ultimately leads to a situation where 80% of the traffic falls on 20% of the roads.

If one businessman has innovative technology, he attracts more customers. This leads to an increase in profit – there is an opportunity to invest in the development of additional technologies, as well as pay salaries to the most productive employees. The company enhances customer satisfaction and business growth and dominates the industry..

If the writer is on the top line in the list of best sellers, he receives the attention of an extensive readership. The gained authority and fame pave the way for the successful release of the next book. Moreover, the success of the first edition will help the publisher to develop a high-profile marketing company for the second novel, which will significantly increase his chances of becoming a bestseller too. As a result, a situation arises in the market where some authors are guaranteed to receive millions of copies, while others hardly sell several thousand books.

The line between good and evil is thinner than it seems.

The presence of small, even the most modest, superiority over competitors affects each individual case of competition. Moreover, in each subsequent collision, the difference becomes more noticeable. The winner strengthens his position with each next cycle of competition.

With the passage of time, the best receive large rewards, and the worst (regardless of the relative degree of lag) receive practically nothing. This idea is referred to in some sources as the Matthew Effect, which refers to Bible lines:

“… for to everyone who has it, it will be given and multiplied, but to him who does not, it will be taken away also what was”.

Let us return to the question that was posed at the very beginning of the article. Why do a minority of people, teams and organizations achieve major rewards, income, victories, etc..?

1 percent rule.

Small differences in performance give rise to an uneven sharing of resources at regular repetition over time. This is an additional argument in favor of “good” habits. The companies and people who make the right decisions consistently and naturally maintain a modest competitive advantage, and as a result take a disproportionate remuneration.

You just have to be a bit better than your rivals, and if you are able to maintain this advantage day by day, you will win again and again, becoming better every time. Thanks to the “Winner takes everything” effect, each victory brings dividends.

We call it the 1 percent rule.

The 1 percent rule states that over time, most rewards will accumulate among people, teams, and organizations that hold a one percent advantage over rivals. You don’t need to be twice as good to get twice as much profit – enough minimal excellence.

The 1 percent rule is not just a reference to the natural fact of the accumulation of resources with a minimal advantage. This is an idea that confirms that people who manage their business at least one percent better than others achieve the highest heights.