Pareto’s 80:20 – 02:08 s’oteraP

In General Mish-Mash, Mish-Mash of Wisdoms on August 7, 2011 at 2:46 pm

I’m numerically capable, I don’t have a problem dealing with ratios – I know how to work out a lowest common denominator, and I’m pretty good with percentages.

But there is a ratio that upsets me. Well, it’s not the ratio but the principle or law derived from it that is the problem. The principle named was named after the Italian economist Vilfredo Pareto has always had me unnerved – given me the shits, really. I had no real idea why. Had not really thought about it much, until the other day. But, I do know that I shudder just about every time I hear it quoted.

Until recently, I thought Pareto was a mathematician – which may explain why mention of the “principle” put me in a state of quiet disquiet. Had I known he was an economist I may have spoken up.

And I definitely would have moaned loudly had I known that the principle was devised not by Pareto but by a business management consultant.  He was honouring Pareto, certainly … but the principle is nothing more than a simple ratio in a social phenomena, boldly transformed into a law and applied injudiciously (maybe even promiscuously) to all manner of stuff.

The principle? Oh! – There are generally 2 names applied, often both in the same breath:

  • The Pareto Principle is the name honouring Pareto (ahem! Yes. Obvious!)
  • And the 80:20 Rule is its alternate name and most often it is
  • Pareto’s 80:20 Principle.

Pareto studied landholdings in Italy in the early 20th Century and discovered that 80% of Italian property was owned 20% of the people. Undoubtedly this was an illuminating and serious discovery and not one to be scoffed.

But declaring this ratio a principle is a big step. And it has the potential trap those who it as gospel.

For example, how often you been told that:

  • 80% of your sales revenue is generated by 20% of your products or
  • 80% of your profit comes from 20% of your effort.

Let’s look a bit more closely.

If 80% of profit comes from 20% of the effort then there is a great trade-off just waiting to happen – forgo that 20% profit, and save the 80% of your effort for something else.

Put that effort into being  creative, writing, painting, sculpting, take up the piano, or just loll about the pool sipping cocktails.

But here is the thing: – if I do forgo that 20% of profit and gain that 80% of effort, does the principle apply to what remains? It must. It is a principle, after all!! So let’s sacrifice the 20% profit again … what happens then?

I think it might be best using real measurements of time and reward.

Imagine you were working 50 hours and making $100 profit.

After your first sacrifice of profits you’d be working 1 day a week for $80 profit.

After your second exchange, you’d be at it for 2 hours for $64 profit … you could keep that going forever if you had time and money metrics that were sufficiently accurate at exceptionally micro levels.

… but assume you made just 4 such decisions, well you’d be plying your trade for around 5 minutes and raking in $41 profit.

And just one more sacrifice would see your profit drop to $32.77, but you’d get that with less than a minute’s worth effort.

In summary:

  • Starting Point:  50 hrs effort gets $100 profit.
  • Pareto Sacrifice 1: 10 hrs effort, $80 profit.
  • Pareto Sacrifice 2: 2 hrs effort, $64 profit
  • Pareto Sacrifice 3: 24 mins effort, $51.20 profit
  • Pareto Sacrifice 4: 4 mins 48 secs effort,  $40.96 profit.
  • Pareto Sacrifice 5: 57.6 seconds effort for $31.77 profit.

This is not quite reductio ad absurdum but it is getting close.  I don’t think anyone would seriously mis-use the principle in such an obvious way. But …

How does this principle influence the decision-making framework in businesses … or anywhere for that matter?

I suspect, it has been responsible for helping frame some, ostensibly, very sensible decisions … and decision processes that have iterated and reiterated until …

Someone wakes up, looks around and realises they have gradually, but effectively, Pareto’d themselves out of value and quality … they have lost the spark that ignited them, lost their point of difference, their beauty, and lost what was amazing about them.

Anyway, what brought on this bit of mish-mash? It was a talk given by software developer Mike Lee. I was recommended to have a listen to it by my good mate Minski. Minski is an irreverent, iconoclastic, card playing, straight shooting computer geek.

Mike Lee’s take on the Pareto ratio, in a nutshell, is that we should shift it about 80:20 – and focus on The Second 80%.

The quality, the art, the beauty, the uniqueness, the thing that makes something amazing emerges by using that second 80% to its limit. This is where you get that spark, the cred and coolness, the characteristics that cannot be replicated by some set of dodgy operators wanting to make a quick buck.

If you want to produce stuff that people will pimp for you, then you need to produce stuff that provokes comments like:

“Hey, check this out, it is sooo cool!”

This means using up the whole Second 80%.

You know we might  take an even simpler approach. And this one comes from designer Giles Kershaw. My interpretation of one of Giles’ principles is pretty simple – do what it takes to get it 100% right. Now, that is an elegantly designed solution that applies to many problems/opportunities… just add the 80 and the 20 together, and voila!!

Pareto Principle? Pfft! Kershaw’s Lemma Rulz!!

Hey, if you want to have a listen to Mike Lee’s talk – called Pimp My App – I’m sure you’ll get plenty out of it. The link is below. But BE CAUTIONED –  the first bit (2’30”) is dedicated to a vulgar joke that has minimal relevance. If you want to avoid the joke (it is about a bear violating a hunter), skip to around that 2’30” mark.

Here is the link to Pimp My App.

The entire talk is about 47’40” but  … sighing, shoulders shrugging.

Damn that Pareto!

The real crux of the talk is the 9 or 10 minutes starting from the 4’40”. That’s, roughly, 20% of the talk. Damn that Pareto Principle – it just pops up everywhere, don’t it?

  1. I guess you are also going to have concerns with the golfers Tree Ratio that a tree is 70% air and 30% wood, leaving you a good chance of getting the ball through until a millisecond after you hit it. I dont know what theory should be applied to what happens next (Schrodinger’s is one possibility) but my ball invariably hits the tree.

    • I love the paradox of the “Golfer’s Tree Ratio” – as you say, you attempt to hit through it with a 70% chance of hitting air but … damn … 90% of the time the ball comes back at you. I don’t think you are alone there.

      I gave up golf the day I got a hole in one. First hit of the day in a sponsors golf day: shotgun start – 7th hole at Penrith. My golfing stats now are enviable.

      The Tree Ratio and how it rudely flaunts sense, reminds me of playing poker on-line where you hold a hand that is an 80% favourite but it gets beaten 80% of the time. Maybe online poker uses some sort of mysterious “Schrodinger Shuffle” rather than a random number generator. If you get to see the “river” it will be the one-outer that beats you, if you don’t it won’t and you would have won the hand.

      Or maybe, Jason, we are just cursed with bad luck. You know it happens to 20% of people (according to some experts).

  2. Yeah! Will have to have a review of the Claude Neon history. As to the 1 in 5 ratio of interesting stuff vs other stuff, i might try an rewrite this – what do you reckon, I just take every 5th word … or every 5th sentence and see what happens.

  3. I found 20% of that really intersting. Looking forward to MishMashMax discussing Claude Neon in some depth!!!

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