Sometime in the late 1800s (no one knows when), a man named Vilfredo Pareto was tending to his garden when he discovered a minor but noteworthy discovery.
Pareto noted that the few pea pods in his garden yielded the most peas.
Pareto was a highly mathematical individual. He was an economist, and one of his major contributions was making economics into a science with quantifiable data. Unlike many economists of his day, Pareto's articles and books were full of equations. And the peas in his garden fuelled his mathematical brain. What if this unequal distribution occurred in other areas of life as well?
At the time, Pareto was studying wealth in many countries. Because he was Italian, he started by analysing the distribution of wealth in Italy.
Surprisingly, he discovered that only 20% of the population owned about 80% of Italy's land. Like the pea pods in his garden, most resources were managed by a few players. Pareto continued the analysis in other countries and patterns began to emerge. For example, after studying UK income tax reports, he found that about 30% of the UK's population earns about 70% of total income. Continuing his research, Pareto discovered that while the numbers are never the same, the trends are surprisingly consistent.
Most awards always seemed to go to a few people.
This idea that a few factors determine most outcomes has come to be known as the Pareto principle, or more commonly the 80/20 rule.
Inequality exists everywhere.
In the years that followed, economists basically accepted Pareto's work as scripture. As soon as he opened the eyes of the world to this idea, people started seeing it everywhere. And the 80/20 rule is now more prevalent than ever. The statistics are considerably more dramatic in soccer. Even though 77 nations took part in the World Cup, just three nations—Brazil, Germany, and Italy—won 13 of the first 20 events.
The Pareto Principle has applications in a variety of fields, including real estate, economic inequality, and digital entrepreneurship. 70% of Guatemalan land was held by 3% of the people in the 1950s. 8.4% of the global population owned 83.3% of the wealth in 2013. Google accounted for 64% of all search inquiries in 2015.
Why is this happening? Why do so few people, teams and organizations win the most awards in life? To answer this question, let's look at an example from nature.
Power of Cumulative Advantage
One of the planet's most diversified ecosystems is the Amazon Rainforest. Scientists have classified about 16,000 species of Amazonian trees. But despite this incredible level of diversity, researchers have found that there are roughly 227 "ultra-dominant" tree species that make up nearly half of the rainforest. Only 1.4% of tree species make up 50% of Amazon's trees. But why?
Think of two plants that are growing side by side. Every day they will compete for sunlight and dirt. If one plant can grow a little faster than another, it can grow taller, receive more sunlight and absorb more rain. The next day, this extra energy allows plants to grow more. This pattern continues until the stronger plants crowd out the others and take most of the sunlight, soil and nutrients. Plants that win from this vantage point are more capable of seeding and reproducing, leaving a much larger footprint for the species in subsequent generations. Repeat this process until plants that are slightly better than their competitors dominate the entire forest. Scientists call this effect "cumulative advantage." What starts out as a small advantage grows over time. A single plant, with a small initial advantage, can drive out competitors and take over an entire forest.
Winner takes all effect.
Similar events take place in our life.
People frequently struggle for the same resources, much like the plants in a rain forest. For the same votes, politicians compete. The top rank on bestseller lists is a point of competition for authors. Competitors are contending for the same gold medal. Companies compete for the same potential customers. TV shows compete for equal hour's attention. The difference between these options can be very subtle, but the winners are massively rewarded. Imagine two men swimming at the Olympics. One of them might be a hundredth of a second faster than the other, but he gets the overall gold medal. Ten companies may submit potential clients, but only one of them will win the project. You only need to do a little bit better than your competition to be fully rewarded. Or perhaps you will apply for a new job. 200 candidates can apply for the same role but do a little better than the other candidates and you get the full position.
Winner-Take-All Effects refer to certain circumstances in which marginal differences in performance result in disproportionate rewards. They frequently take place in circumstances involving relative comparison, where your success is based on how well you do in contrast to people around you.
Although not every aspect of life is a winner-take-all effect, almost every one of them is at least somewhat impacted by few resources. Any choice that calls for spending a finite resource, such as time or money, will always lead to a winner-take-all situation.
Being slightly superior to the opposition in these circumstances might result in disproportionate benefits since the winner gets it all.
You only win by 1%, 1 second or 1 dollar, but you win 100%. The benefit of being a little better isn't just a little bit more reward, it's an overall reward. The winner gets 1 and the others get 0.
Winner Takes All Leads to Winner Take Most
The Winner Takes All effect can lead to the winner taking the most in individual competitions. With a gold medal in hand, cash in the bank, an office chair, or any other vantage point, the winner begins the process of accumulating an advantage to make winning next time easier. What started out as a small margin is slowly turning into an 80/20 rule. If one road is slightly more convenient than another, more people move along it and more businesses are likely to be built next to it. As more businesses are built, people will have an additional reason to use the roads, gaining more traffic. You'll soon be reminded of the saying "20% of the roads account for 80% of the traffic". If one company uses more innovative technology than another, more people will buy the product.
The more money a business makes, the more technology it can invest, pay higher wages, and hire better people. Until the competition heats up, customers have other reasons to stick with their first business. Soon the industry is dominated by one company. When an author hits the bestseller list, publishers will be more interested in his next book. When the second book comes out, publishers will invest more resources and marketing opportunities into the book, making it easier for it to hit the bestseller list a second time. You soon begin to understand why a few books sell in the millions while most books struggle to sell in the thousands. The line between good and good is narrower than you think. What starts out as a slight advantage over the competition is exacerbated by each additional challenge. Your chances of winning the following competition rise if you win the first one. Each additional cycle further strengthens the status of those at the top. Those who get a little better over time get the most rewards. Slightly worse, you get almost nothing. From the one who has nothing, what he has will be taken away.” Now let's go back to the question we asked at the beginning of this article. Why do so few people, teams and organizations win the most awards in life?
Rule of Success - 1% Rule of daily improvement
So the hidden rule of success is when repeated over time, even slight variations in performance can result in extremely unequal distributions.
This is another reason habits matter.
People and organizations that can more consistently do the right thing are more likely to retain a small advantage and be rewarded disproportionately over time.
You just have to be a little better than your competitors, but if you can maintain a slight edge today, tomorrow and the day after tomorrow, you can repeat the process of winning by a small margin again and again. And thanks to the "Winner Takes All" effect, you'll receive huge rewards for each win. You could call this the one percent rule.
The 1% rule states that most rewards in a given domain over time accrue to people, teams, and organizations that maintain a 1% advantage over alternatives.
You don't have to be twice as good to get twice the results.
You need to be a little better.
The 1% rule refers not only to the fact that small differences lead to significant advantages, but also to the idea that there are people who are 1% better at managing their fields and industries.
Thus, the process of cumulating advantages is the hidden mechanism that drives the 80/20 rule.
Thanks for reading…
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