Richard Koch had a problem.
The most important exams of his life – the ones that would determine whether or not he would graduate from the prestigious University of Oxford – were fast approaching. He just didn’t have enough time to study for them.
Koch had 11 exams in total, all of which had 50 questions. During each exam, he had to answer 3-4 of those questions with detailed long-form essays over three hours. He didn’t have enough time to study 50 questions times 11 exams – or 550 topics!
But, as luck would have it, he stumbled across a book called The Course of Economic Theory, written by Vilfredo Pareto. He realized that he was looking at his exam prep all wrong.
He didn’t have to study 550 topics. He could use the Pareto Principle to learn only a handful of topics and still ace his tests.
He went through the old papers from 20 years of exams and found that there were about six topics per exam common among all the papers.
So, he studied those six for each test and assumed that those topics would appear on his exam if history were to repeat itself.
And they did. He aced his tests and graduated with top honors from Oxford, all thanks to the Pareto Principle.
The Pareto Principle states that 80% of outcomes come from 20% of all causes or possible factors in any given event. For this reason, it’s also known as the 80/20 rule.
Remember, Koch didn’t have to study 100% of the material for his exams. He only needed to study the 20% that was bound to show up based on history.
In the same way, Koch explains that the best results in life come from only a handful of causes. If you can put more energy into the 20% that gives you 80% of the outcomes, you’ll get much more accomplished in less time.
Here’s an excerpt from Koch’s book, The 80/20 Principle:
The 80/20 Principle asserts that a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards. Taken literally, this means that, for example, 80 percent of what you achieve in your job comes from 20 percent of the time spent. Thus for all practical purposes, four-fifths of the effort—a dominant part of it—is largely irrelevant… Every person I have known who has taken the 80/20 Principle seriously has emerged with useful, and in some cases life-changing, insights.
To Koch, it’s simple: Do more of the stuff that works and less of the stuff that doesn’t.
The Pareto Principle makes it clear that *what you work on* matters far more than how *hard you work.*
Here’s Koch again from his book:
It was better to be in the right place than to be smart and work hard. It was best to be cunning and focus on results rather than inputs. Acting on a few key insights produced the goods. Being intelligent and hard working did not.
If getting wealthy is your goal, you’re going to have to work as hard as you can. But hard work is no substitute for who you work with and what you work on. Those are the most important things.
Most people do not spend nearly enough time figuring out what to work on. Even I am guilty of this. Sometimes the need to “work hard” overpowers the need for slow, careful consideration of what to work on.
So take your time. Moving in the right direction matters far more than how fast you move.
Once you start looking for the Pareto Principle in your life, you won’t be able to unsee it.
Here are some examples from Koch and my own experiences that will help illustrate how useful it can be.
While many of the following examples are related to “work,” Koch does provide some ideas to apply the 80/20 principle in your personal life.
You can apply it to your friendships by spending more time with the 20% of your friends who give you the majority of your relationship satisfaction.
You can apply it to your personal life by spending more time doing the 20% of the activities that generate 80% of your peace or happiness.
You can even apply it to your health by spending more time on the 20% of inputs (exercises, foods, etc.) that make up 80% of your progress.
Take a look at your life and see if you can identify the factors contributing to the majority of your growth. Then do more of that stuff!
Here’s an example of how I’ve used the Pareto Principle to drive more traffic to my site.
As you can see below, the vast majority of my website visitor traffic on Wealest.com (outside of direct traffic) comes through Google Search.
Here’s the breakdown:
Google Search is about 3X more effective than Twitter at driving traffic.
But for a long time, I was spending more time posting on Twitter than I was crafting great SEO (Search Engine Optimized) articles.
The Pareto Principle gives me an easy answer as to where I should spend my energy. If it’s traffic to my site I want, I need to focus my efforts on writing good search engine optimized articles, not posting to social media.
Twitter is another arena where the Pareto Principle dominates.
In a recent study, Pew Research found that 10% of those on Twitter are responsible for 80% of tweets. In that 10%, the median user tweeted 138 times a month and had 387 followers. The top ten percent is contributing 80% of the action.
When it comes to Twitter impressions on my account, the 80/20 principle still dominates. Here are my impressions over the last 28 days:
There are two or three days out of the 28 that contribute to almost half of my total Twitter impressions.
And almost all of those spikes were caused by “likes” from Naval Ravikant.
If my only goal were more Twitter impressions, it would seem like tweeting at Naval all day would do it. Fortunately, I have more aspirational goals than to become a spam bot!
In most online communities, most activity comes from only 1% of users, with 9% participating sporadically, and an overwhelming 90% of users “lurking.”
Here’s an illustration from the Nielsen Norman Group that shows this:
Lurking refers to participants who remain in the background and occasionally read or observe other users’ activity without ever participating.
This info is valuable if you are looking to build a community of your own. It would be imperative that the community admins, charged with the site’s growth, cultivate relationships with the top 10% of users who create the vast majority of the content. If they are unhappy with the community and decide to leave, you’re in trouble.
And suppose you are creating content yourself to help spur community growth. In that case, you should examine what your 1% fixates on and how to translate that into content or incentivized interactions for the remaining 99%.
If you find only a few good companies to invest in over your lifetime, you can build wealth.
Charlie Munger and Warren Buffett built Berkshire Hathaway by making only a handful of very concentrated bets that compounded over time.
Koch has had a similar experience. Here he is again from his book:
80 percent of the increase in wealth from most long-term portfolios comes from fewer than 20 percent of the investments. It is crucial to pick this 20 percent well and then concentrate as much investment as possible into it. Conventional wisdom is not to put all your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk.
Koch tells Tim Ferriss that his portfolio contains about 40 assets in total. But only two are responsible for the majority of his profits. One company constitutes about half of his portfolio’s total value, with a second company bringing in another quarter.
The key is to identify (and hold!) the 20% of investments that will make up 80% of your gains. It’s not an easy game, but one worth playing.
The Pareto Principle takes hard work out of the equation. You are better off spending time figuring out what to work on – the 20% – that will be most impactful in getting you the majority of your outcome – the 80%.
It’s about working on the right things (the inputs) with the right people and pushing forward until you get the outcome you’re looking for.
Don’t work hard. Work smart.