Extremistan and the 80/20 Rule

intermediate3 min readeconomics · statistics · sociology · business

The 80/20 rule illustrates concentration: a small share of inputs, such as 20%, may account for a large share of outputs, such as 80%. Taleb emphasizes that the proportions vary and that identifying the biggest contributors in advance is a separate problem.

THE IDEA

Extremistan and the 80/20 Rule

Have you ever heard of the 80/20 rule? It is the common signature of a power law—actually it is how it all started, when Vilfredo Pareto made the observation that 80 percent of the land in Italy was owned by 20 percent of the people. Some use the rule to imply that 80 percent of the work is done by 20 percent of the people. Or that 80 percent worth of effort contributes to only 20 percent of results, and vice versa.

As far as axioms go, this one wasn’t phrased to impress you the most: it could easily be called the 50/01 rule, that is, 50 percent of the work comes from 1 percent of the workers. This formulation makes the world look even more unfair, yet the two formulae are exactly the same. How? Well, if there is inequality, then those who constitute the 20 percent in the 80/20 rule also contribute unequally—only a few of them deliver the lion’s share of the results. This trickles down to about one in a hundred contributing a little more than half the total.

The 80/20 rule is only metaphorical; it is not a rule, even less a rigid law. In the U.S. book business, the proportions are more like 97/20 (i.e., 97 percent of book sales are made by 20 percent of the authors); it’s even worse if you focus on literary nonfiction (twenty books of close to eight thousand represent half the sales).

Note here that it is not all uncertainty. In some situations you may have a concentration, of the 80/20 type, with very predictable and tractable properties, which enables clear decision making, because you can identify beforehand where the meaningful 20 percent are. These situations are very easy to control. For instance, Malcolm Gladwell wrote in an article in The New Yorker that most abuse of prisoners is attributable to a very small number of vicious guards. Filter those guards out and your rate of prisoner abuse drops dramatically. (In publishing, on the other hand, you do not know beforehand which book will bring home the bacon. The same with wars, as you do not know beforehand which conflict will kill a portion of the planet’s residents.)

When to use it

Prioritizing tasks: test whether a small share, illustrated as 20% of tasks, produces a large share, illustrated as 80% of results.
Business: examine whether 20% of customers generate 80% of revenue, rather than assuming those proportions hold.
Quality control: check whether 20% of defect types account for 80% of problems, then prioritize based on the actual pattern.
Investing: examine how much past returns depended on a few holdings and whether those contributors could have been identified in advance.

FROM THEORY TO EVERYDAY LIFE

In practice

Italy Land Ownership

Vilfredo Pareto observed that 80 percent of the land in Italy was owned by 20 percent of the people.

U.S. Book Sales

In the U.S. book business, proportions are more like 97/20, i.e., 97 percent of book sales are made by 20 percent of the authors.

Prisoner Abuse

Malcolm Gladwell wrote that most abuse of prisoners is attributable to a very small number of vicious guards; filtering them out drops abuse dramatically.

✳

A MOMENT TO REFLECT

Put it to work.

Think of a domain in your life where the 80/20 rule might apply. Can you identify the vital few inputs that contribute most to outcomes?
How does the predictability of the concentration affect decision-making? In which situations can you identify the top 20% beforehand?
Why is the 80/20 rule called a 'metaphor' rather than a rigid law? Provide an example where the proportions deviate significantly.