Pareto Principle

80% of the effects come from 20% of the causes. This distribution seems to repeat in many problem spaces where there is an imbalance between the inputs and outputs.

  • Advantages Accrue to the Leader

    Markets exhibit the Pareto principle in that most of the advantages accrue to a small number of players—mostly number one. These advantages include growing faster, network effects, recruiting the best people, expanding to new opportunities quickly and most of the 7 Powers.

  • Compounding Is Unintuitive Because the Initial Curve Feels Flat

    I’ve always wondered why the nature of compounding and any exponential relationship feels unintuitive. That is until I read this quote from Paul Graham’s essay How to do great work.

  • Zipf’s Law

    Given a corpus of language, the frequency of a word (how many times it shows up in the corpus) is inversely proportional to its rank in the frequency table of words. For example, ‘the’ appears 2x as much as ‘of’ (7% of words, 3.5% of words respectively). This is another example of the Pareto principle.

  • The Pareto Principle and Chatbots

    Support cases at many businesses follow the Pareto principle. For example, DoorDash and Uber 87% of support requests relate to 16 issues. Deploying chatbots to solve high concentration issues makes it economical to build and maintain conversation trees by hand. What about the remaining 20% and what about businesses that have a wider distribution of issue types?

  • The Economics of Superstars

    There are two common elements of economic superstars. First, there is a close connection between personal reward and size of the market. Second, there is a tendency for market size and reward to be skewed to the most talented people in the field.