Strive for Excellence in a few things, rather than good performance in manyRichard Koch
The 80/20 Principle | Richard Koch
The 80/20 principle, otherwise known as the Pareto Principle or the Principle of Factor Sparsity states that 80% of the effects come from 20% of the causes. This has been shown to be the case in many scientific and mathematical models in society from land ownership, wealth disparity and income tax distribution. It is also an axiom of business to say that 80% of sales come from 20% of clients, and in management that 80% of your problems come from 20% of your employees.
When applied to your personal or business finances, my take on the 80/20 principle was that you should focus on the basics first (for example starting investing in an ultra low cost index fund). The law of diminishing returns means the effort expended on the advanced details will yield much smaller results (for example trying to pick different types of index fund). The rule of thumb therefore is to focus on the 20% of causes to improve 80% of the results, and not on the 80% of causes (input) for the 20% of results. This is also thought of as getting the ‘80% solution on time’ rather than the ‘100% solution that never comes’.
Koch explains that when Steve Jobs returned to Apple in ’97, he cut the companies product line from 300 down to under 10. This allowed the company to focus on the minority (of products) which was producing the majority of profits for the company, and allowed time and focus to improve those.
A parallel can be drawn to social circles and friendships; do you find that you have the majority of your fun with only 20% of your friends? If you can identify this 20%, you should most of your effort into these relationships. It is much better to have a small group of really good friends than a big bunch of distant friends.
The Pareto principle or 80/20 rule can be applied to any area of your life; you just need to identify the 20% that produces the greatest outcome, and then you can spend more time doing that. It also helps you cut back on the 80% of the things which waste your time but provide only 20% of the results. It encourages you to think efficiently and what really matters.