The world’s top 40 most populous countries (out of nearly 200) make up 80% of the human population. The most frequently used 18% of words account for over 80% of the content of any text. The richest 20% of the global population own about 80% of all the money in the world. What’s going on here?
This, in essence, is the Pareto Principle, often dubbed the 80-20 rule. It’s a theory that for any event, 20% of the causes are responsible for 80% of the effects. Although, the numbers don’t have to be 80-20, and they don’t have to add to 100. They can be 70-25 or 90-15, for example. The main idea is that not all causes are born equal, and that there is an uneven distribution on how much of an effect each cause has. Let’s look at some more ridiculous examples.
The most well known and researched example is Zipf’s Law. Now, specifically Zipf’s law states that in any given text, graphing the frequency each word appears in and the rank of that word in terms of frequency on a log-log scale should produce a straight 45 degree line
Now, this very much should seem surprising to you, unless you’re a robot. We’ve always thought of language and literature as the very opposite of math: it’s subjective, fluid, idiosyncratic. It seems wholly unbelievable that both Shakespeare’s Hamlet and Darwin’s Origin of Species – two works written by different authors at different time periods for entirely different purposes – both follow such a simple mathematical rule.
Another big example: Economics. In a lot of cases, and I mean a LOT, Pareto’s principle applies. In the early 20th century Vilfredo Pareto, the Italian economist after which this phenomenon was named, showed that roughly 80% of Italy’s land was owned but just 20% of its people. In 2018, statistics showed that the top 20% of earners in the US payed between 80-90% of the total federal income tax collected.
Let’s go back again to that statistic about the richest 20% of the world owning 80% of all global assets. Pretty standard example of what I’ve shown you so far. But what if we apply it again? The richest 20% of that 20% should own 80% of that 80%. In other words, the richest 4% should own 64% of the world’s wealth. Apply it again, and we get the richest 0.8% should own just over HALF of the all the money in the world. And Oxfam statistics for 2015 and Credit Suisse’s 2013 report BOTH confirm this, showing the top 1% owning over 50% of global wealth.
Again, it really should blow your mind that this simple distribution should apply in so many cases, even when iterated. Economics is notorious for its over-generalization and abstraction of the complexity of markets, businesses and entire countries. Money is circulated and flows through a multitude of facets for numerous reasons by billions of people all over the globe simultaneously. Yet we can predict the distribution of the world’s wealth across multiple scales using but a simple power distribution.
Now, it’s all well and good using the Pareto Principle to notice large trends in the world, but it can help you out a whole lot in your day-to-day life too. Look at it this way: 80% of your problems can be solved by changing 20% of the causes.
Let’s take a classic example: trying to lose weight. It can be challenging and there’s no shortage of different advice from different people. But just remember that 80% of your calories will likely come from 20% of your food. Thus, just by identifying and cutting a tiny part of your food, you can dramatically reduce your caloric intake. You don’t have to halve your breakfast, lunch and dinner, you can just not eat that 200 calorie chocolate bar.
And businesses LOVE this principle. Several “rules of thumb” in business are based on this simple power law: 80% of your complaints and your income are from 20% of your customers.
And lastly, 20% of what you read and watch ends up taking 80% of your memory. I surely hope this post finds itself into that 20%.