A guy called Vilfredo Pareto was fussing around in his garden somewhere in the late 1800s—no one knows precisely when—when he discovered a minor but noteworthy discovery.
In his garden, Pareto noted that a small number of pea pods generated the majority of the peas.
Pareto, on the other hand, was a mathematician. He was an economist, and one of his major contributions was to make economics into a science based on hard figures and facts. Pareto’s writings and publications, unlike those of many other economists at the time, were dense with equations. And the peas in his garden had triggered his mathematical mind.
What if this lopsided distribution was also found in other aspects of life?
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The Pareto Principle
Pareto was researching wealth in several countries at the time. He began by examining the distribution of wealth in Italy, as he himself Italian. To his amazement, he realized that just around 20% of the people in Italy controlled nearly 80% of the land. The majority of the resources, like the pea pods in his garden, were held by a small group of players.
Pareto continued his research in other countries, and a pattern emerged. For example, he discovered that nearly 30% of the population in Great Britain received almost 70% of the entire income after combing over British income tax statistics.
Pareto discovered that while the numbers were never precisely the same, the pattern was astonishingly stable as he continued his studies. The majority of the benefits always seemed to go to a tiny group of people. The Pareto Principle, or more often known as the 80/20 Rule, is the premise that a small number of items account for the majority of the results.
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Inequality, Everywhere
Pareto’s work became nearly scripture for economists in the decades that followed. People began to notice this notion everywhere when he opened the world’s eyes to it. And now, more than ever, the 80/20 Rule is in use.
In the National Basketball Association, for example, 20 percent of clubs won 75.3 percent of titles during the 2015-2016 season. Furthermore, just two teams have won roughly half of all NBA championships: the Boston Celtics and the Los Angeles Lakers. A few teams, like Pareto’s pea pods, account for the majority of the benefits.
In soccer, the statistics are much more dramatic. Despite the fact that 77 countries have played in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 tournaments.
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The Power of Accumulative Advantage
The Amazon rainforest is home to one of the world’s most varied ecosystems. In the Amazon, scientists have identified around 16,000 distinct tree species. Despite this astonishing variety, researchers have revealed that over half of the rainforest is made up of roughly 227 “hyperdominant” tree species. Only 1.4 percent of tree species account for half of the Amazon’s trees.
But why is that?
Consider two plants growing next to each other. They will compete for sunshine and dirt every day. If one plant grows somewhat quicker than the other, it may reach greater heights, collect more sunshine, and absorb more rain. This extra energy causes the plant to develop even more the next day.
The winning plant has a higher capacity to distribute seeds and reproduce from this advantageous position, giving the species an even larger footprint in the next generation. This process is continued until the plants that are somewhat superior than the competitors have taken over the entire forest.
This phenomenon is known as “accumulative advantage” by scientists. What starts off as a minor advantage grows over time. To crowd out the competitors and take over the entire forest, one plant just needs a little advantage at first.
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Winner-Take-All Effects
Humans, like plants in the jungle, compete for the same resources. Politicians vie for the same number of votes. Authors vie for the number one place on the best-seller list. Athletes compete for a gold medal in the same event. Companies are vying for the same prospective customer. Television shows fight for your attention within the same hour.
The distinction between these possibilities might be razor-thin, yet the winners reap substantially disproportionate benefits.
Consider two female swimmers competing in the Olympics. Even if one of them is 1/100th of a second quicker than the other, she takes home the entire gold medal. Even if 10 organizations pitch to a potential client, only one will get the deal. To get all of the rewards, you simply need to be somewhat better than the competitors. Or maybe you’re looking for a new career. There may be 200 people vying for the same job, but if you’re just a smidgeon better than the others, you’ll get the job.
Situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects.
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Winner-Take-All Effects are circumstances in which little variations in performance result in disproportionately large rewards. They are most common in settings involving relative comparison, in which your performance in relation to others is the decisive factor in your success.
Although not everything in life is a winner-take-all competition, limited resources impact practically every aspect of existence. Any choice that requires the use of a finite resource, such as time or money, is inevitably a winner-take-all situation.
Because the winner takes all in settings like this, being just a little bit better than the opponent might result in outsized rewards. You may only win by 1%, a second, or a dollar, but you have 100% of the triumph.
Winner-Take-All Leads to Winner-Take-Most
Individual tournaments with Winner-Take-All effects can lead to Winner-Take-Most effects in the bigger game of life.
The winner begins the process of gathering advantages that make it simpler for them to win the next time around from this favorable position—with the gold medal in hand, cash in the bank, or the Oval Office chair. What started as a little margin is now approaching the 80/20 Rule.
More people will drive down one route if it is marginally more convenient than the other, and more companies will likely grow beside it. As more companies are developed, individuals will have more reasons to use the route, resulting in more traffic.
If one company has a more innovative technology than another, more people will buy their items. As the company grows, it will be able to invest in new technology, pay greater compensation, and attract better employees. Customers have other reasons to continue with the original firm by the time the competition catches up. The industry is soon dominated by a single business.
Publishers will be more interested in an author’s next book if they reach the best-seller list. When the second book is out, the publisher will devote more resources and marketing muscle to it, making it easier to return to the best-seller list.
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The difference between good and exceptional is smaller than it appears. With each subsequent competition, what starts as a modest advantage over the competitors grows. Winning one competition increases your chances of winning the following one. Each subsequent cycle solidifies the standing of those at the top.
Those that are marginally better accumulate the majority of the benefits over time. Those who are somewhat less fortunate receive next to nothing. This concept is known as The Matthew Effect, after a Bible verse that reads, “For all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away.”
The 1 Percent Rule
When small variations in performance are repeated over time, they can grow to substantially uneven distributions. Another explanation for the importance of habits is that they allow us to be more productive. People and organizations who can continuously do the right things have a better chance of maintaining a minor advantage and accruing disproportionate benefits over time.
You only need to be slightly better than your competitors, but if you can retain that modest advantage today, tomorrow, and the next day, you can continue the process of winning by a small margin over and again. And, because to Winner-Take-All Effects, each victory comes with a hefty payout.
This is referred to as the 1% Rule. The 1 Percent Rule argues that over time, the people, teams, and organizations who maintain a 1% edge over the competition will receive the bulk of the rewards in a given area. To obtain double the outcomes, you don’t have to be twice as excellent. All you have to do now is improve somewhat.
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The 1 Percent Govern refers not just to the reality that minor differences add up to big gains, but also to the belief that individuals who are one percent better than everyone else rule their sectors and businesses. As a result, the 80/20 Rule’s secret motor is the accumulative advantage process.
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