The Gap Between Good and Great Starts Small
In the late 1800’s an Italian economist named Vilfredo Pareto was working in his garden, there he made a very keen observation.
Mr. Pareto noticed that a small number of pea pods in his garden produced the majority of the peas.
Mr. Pareto worked as an economist and one of his lasting legacies was turning economics into a science rooted in hard numbers and facts.
Unlike many economists of the time, Pareto’s papers and books were filled with equations, thus the peas in his garden had set his mathematical brain in motion.
The Big Q: What if this unequal distribution was present in other areas of life as well?
At the time, Mr. Pareto was studying wealth in various nations.
He was Italian, so he began by analyzing the distribution of wealth in Italy. To his surprise, he discovered that approximately 80% of the land in Italy was owned by only 20% of the people. Likened to the pea pods in his garden, most of the resources were controlled by a minority of the players.
Mr. Pareto continued his analysis in other nations and a pattern began to emerge.
For instance, after poring through the British tax records, he noticed that about 30% of the population in Great Britain earned about 70% of the total income.
Mr. Pareto continued his research and found that the numbers were never quite the same, but the trend was consistent.
The majority of rewards always seemed to accrue to a small percentage of people. This idea that a small number of things account for the majority of the results became known as the Pareto Principle or, more commonly, the 80/20 Rule.
In the years that followed, Mr. Pareto’s work became gospel for economists. Once he opened the world’s eyes to this idea, people started seeing it, and now the 80/20 Rule is more prevalent than ever before.
Through the 2015–2016 season in the National Basketball Association (NBA), 20% of franchises have won 75.3% of the championships.
Furthermore, just 2 franchises, the Boston Celtics and the Los Angeles Lakers , have won almost 50% of all the championships in NBA history.
Like Pareto’s pea pods, a few teams account for the majority of the rewards.
The numbers are even more extreme in soccer.
While 77 different nations have competed in the World Cup, just three countries, Brazil, Germany, and Italy have won 13 of the 1st 20 World Cup tournaments.
Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups.
In Y 2013, 8.4% of the world population controlled 83.3% of the world’s wealth.
In Y 2015, 1 search engine, Google (NASDAQ:GOOGL), received 64% of search queries.
More Big Q: Why do a few people, teams, and organizations enjoy the bulk of the rewards in life?
The Big A: The Power of Accumulative Advantage
The Amazon rainforest is one of the most diverse ecosystems on Earth. Scientists have cataloged approximately 16,000 different tree species in the Amazon. But despite this remarkable level of diversity, researchers have discovered that there are approximately 227 “hyper-dominant” tree species that make up nearly half of the rainforest. Just 1.4% of tree species account for 50% of the trees in the Amazon.
Here is why.
Imagine 2 plants growing side by side. Each day they will compete for sunlight and soil. If 1 plant can grow just a little bit faster than the other, then it can grow taller, catch more sunlight, and soak up more rain.
The next day, this additional energy allows the plant to grow even more. This pattern continues until the stronger plant crowds the other out and takes the lion’s share of sunlight, soil, and nutrients.
From this advantageous position, the winning plant has a better ability to spread seeds and reproduce, which gives the species an even bigger footprint in the next generation. This process gets repeated again and again until the plants that are slightly better than the competition dominate the entire forest.
Scientists refer to this effect as “accumulative advantage.”
What begins as a small advantage gets bigger over time, a 1 plant just needs a slight edge in the beginning to crowd out the competition and take over the entire forest.
Something similar happens in the lives of all people, they like plants in the rain forest, humans are often competing for the same resources.
Politicians compete for the same votes.
Authors compete for the same spot at the top of the best-seller list.
Athletes compete for the same Gold Medal.
Companies compete for the same potential client.
Television shows compete for the same hour of viewers attention.
The difference between these options can be very thin, but the winners enjoy massively outsized rewards.
Consider 10 companies pitching a potential client, but only 1 of them will win the project. So, one only need to be a little bit better than the competition to secure all of the reward.
We are all aware of situations in which small differences in performance lead to outsized rewards.
We know it as the Winner-Take-All Effect.
Such effects occur in situations that involve relative comparison, where one’s performance relative to the others is the determining factor for success.
Notably, not everything in life is a Winner-Take-All competition, but nearly every area of life is at least partially affected by limited resources. Any decision that involves using a limited resource like time or money will naturally result in a Winner-Take-All competition.
So, in such situations being just a little bit better than the competition can lead to outsized rewards because the winner takes all.
You only win by 1% or 1 sec or 1$, but capture 100% of the ‘Spoils’.
The advantage of being a bit better is not a little bit more reward, but The Reward. The winner gets one and the rest get Zero.
Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life.
From this advantageous position the winner begins the process of accumulating advantages that make it easier for them to win the next round.
So, what began as a small margin begins to trend toward the 80/20 Rule.
If a business has a technology that is more innovative and disruptive than another, then more people will buy it products.
As the business makes more money, it can invest in more technology, pay higher salaries, and hire better people.
By the time the competition catches up, there are other reasons for customers to stick with the 1st business. Soon, 1 company dominates the industry.
The margin between good and great is narrow in the beginning but the gap widens going forward.
Winning 1 competition improves the odds of winning the next. Then each new cycle further cements the status of those at the Top.
Over time, those that are slightly better end up with the majority of the rewards.
Those that are slightly worse end up with next to nothing.
This idea is sometimes referred to as The Matthew Effect, which references a passage in The Bible that says, “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.”
Back to the 1 of the Big Qs: Why do a few people, teams, and organizations enjoy most of the rewards in life?
This is the Why: Small differences in performance can lead to very unequal distributions when repeated over time. This is yet another reason why habits are so important. The people and organizations that can do the right things, more consistently are more likely to maintain a slight edge and accumulate disproportionate rewards over time.
So, one only need to be slightly better than the competition, maintain a slight edge today and tomorrow and the day after that, then you can repeat the process of winning by just a little bit over and over again, each win delivers outsized rewards thanks to Winner-Take-All Effects.
The 1% Rule states that over time the majority of the rewards in a given field will accumulate to the people, teams, and organizations that maintain a 1 percent advantage over the alternatives.
One need to be 2X as good to get 2X the results, one just need to be slightly better.
Now comes the 1% Rule
This Rule is not just a reference to the fact that small differences accumulate into significant advantages, but also to the idea that those who are just 1% better rule in their respective fields and industries.
In Summary: the process of accumulative advantage is the Key driver of the 80/20 Rule.
So, always be passionate, strive to be a bit better than the competition, and you can make it happen.
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