Richard Koch

Don’t waste your time on the trivial

Richard Koch on applying Pareto’s 80/20 principle to life

Richard Koch is an Entrepreneur and Investor and bestselling author of The 80/20 Principle. I interviewed him in 2011 as part of my MetaHack interview series.

Avi Solomon: Could you tell us a bit about yourself?

Richard Koch: I have a very pleasant life and spend most days in the sun, switching between my homes in Cape Town and ‘Iberia’ (Gibraltar, Spain, Portugal) according to the season. Most days involve a few hours writing, playing tennis, cycling, hiking, walking the dog, gym, reading, and seeing friends for dinner. I try to do only things that I’m interested in, enjoy, and may help other people. Most people would say I’m rich, but I don’t spend a lot of money, I drive cars that are years old, and I hate shopping except for food, wine, and books. My sole extravagances are travel and my homes - and sometimes betting, which fascinates me. Apart from that, I lead a simple life. I adore eating out with friends but never go to expensive restaurants. I have a partner and a brown Labrador called Tocker, and I love both of them too.

Avi: What is Pareto’s 80/20 principle?

Richard: The 80/20 principle says that the world is lopsided in that a majority of results tend to come from a minority of causes. It doesn’t matter if it’s 80/20, 70/30 or 95/5 (or anything else). A recent example re Twitter - it turns out that there is a clear Paretoesque relationship in that only about half of Twitter’s registered accounts follow 2 or more people. Only about 10% of them follow more than 50 people. One and a half million Twitter accounts, less than 1% of the total follow more than 500 people. Just two accounts follow more than half a million people. If you do the math you find that 10% of Twitter accounts follow 85% of all the people followed.

I could give dozens of other examples but the telling thing is that whenever you do this type of analysis you NEVER find a relationship approaching 50/50, i.e. half of causes lead to half of results. The lowest it ever gets in my experience is about 65/35 and that is very rare.

The point is not the 80/20 either, because at the extreme you will find a tiny proportion of very powerful events or causes that account for many times their “natural” right to cause results. Fewer than 0.2% of books account for roughly half of their sales, less than 0.1% of ethical drugs constitute half the pharmaceutical industry’s sales, and less than a quarter of one percent of all companies listed in the world account for 50% the total value of companies. Risk managers have found that under 0.1% of all risky events cause at least half the losses. More loosely, you can see the psychological and practical effect of very few events in the world, for example the American and French Revolutions, the war of 1914-18 and its corollaries including the Soviets and Nazis, dropping the atom bombs on Japan in 1945, 9/11, and on the positive side discoveries such as penicillin, the silicon chip and the internet.

There is no right or wrong about the 80/20 principle. It is not a good or bad thing, or rather it is clearly both. In saying wealth follows that pattern I am not advocating unequal distributions of wealth. I am just observing a fact. And left wingers should note that a century of increasing taxation has made little dent on the inequality. It is baked into the structure of society. If you are on the right you say that’s natural, if you are a liberal you say that means we should try much harder to remove inequality at source, i.e. in education. Personally I lean to the liberal side, but that’s just my opinion and has nothing to do with the 80/20 principle.

Many economists believe that the 80/20 principle is some kind of law. Paul Krugman has related it to a whole host of similar power laws that have weirdly unbalanced relationships that can be, in his words, “terrifyingly precise”. Back in 1936, economists at Harvard reviewed Pareto’s finding and found it worked amazingly well. In the 1950s the distinguished economist Josef Steindl wrote “For a very long time the Pareto law [the 80/20 principle] has lumbered the economic scene like an erratic block on the landscape: an empirical law that nobody can explain.”

Frankly I don’t know if the principle is a law or a rule of thumb, and I don’t much care. I do know it’s incredibly powerful and can help anyone make much more of their life, by working with the grain of the universe instead of against it. I hope the skeptics will at least look at one of my books and discover the power they can have.

Avi: Your book “The 80/20 Principle” is a huge underground bestseller. How did the book originate? Can you explain its appeal?

Richard: I had written a half page on the 80/20 principle as part of a book on business strategy. A publisher friend read that and suggested a whole book about the principle. I laughed. “I can write two paragraphs about the principle,” I said, “maybe even a whole page - but there is not enough to say for a whole chapter, let alone a whole book.” But then I started researching the idea. There were hundreds of articles about the principle on the Internet and clearly a lot of interest.

Then I read Italian economist Vilfredo Pareto’s book published in 1896-7 - the second volume published in 1897 describes the pattern of wealth which followed a regular relationship which today we call a “power law” and which corresponds to the pattern that 80% of wealth and income went to 20% of the income earners, that 50% belongs to 5% of earners, and so on. I didn’t say anything very original about the principle in relation to business - though I did point out how it had always worked when I looked at the relationship between the profits and customers or products. Roughly 20% of key products or customers always accounted for a large majority of profits, which suggests firms would do well to focus on a small part of their business.

But then I started to think - could the principle apply to time? I decided that it could, that a small proportion of our time accounted for most of our valuable output, and even our happiness. That suggested to me that time management was beside the point, tinkering at the edges, and that people needed a time revolution - we all needed to change our lives to focus on the best moments and times and make those the core of our lives. Then I thought - if the principle can apply to time, why can’t it apply to other aspects of our personal lives?

And that was the original part of my book. It was a reinterpretation of Pareto applied to the whole of our lives and not just to business or economics. It was this that struck a chord. I’ve received thousands of emails saying that the book has helped people, but very few of the people say anything about business. They talk about how the book has helped them in their careers but especially in their private lives.

The book was commissioned in America by an editor in New York who then left the publishing firm - it was an “orphaned book”. But somehow it started to sell, with almost no promotion. It’s sold more than three quarters of a million copies, been translated into 33 languages, and is still going strong (in a new edition) 14 years after the first edition. So yes, it is an underground hit, propelled by word of mouth. It’s sold over 100,000 copies in Korea, and the same in Japan - and I’ve never set foot in either country to promote the book. It is just that the idea is so strong - I don’t deserve the credit. That should go to the shaggy professor and the online enthusiasts who keep the idea front of mind.

Avi: Why is applying Pareto’s law to one’s personal life so powerful?

Richard: There are lots of self-help books that require you to believe in an idea, so it is often self-fulfilling and there is no scientific way to test whether it is the idea or the belief that delivers results. What happens if you lose your faith in the idea? But the 80/20 principle is not like that. It works whether you believe in it or not. It is really counter-intuitive - how can it be true that a small proportion of inputs nearly always lead to most of the results? For example, we all think we are short of time, but if we only make good use of a small proportion of our time, it can’t be in short supply. We are actually awash with time and profligate in misusing it!

When the principle is tested, when you have empirical research to look, for example, at the relationship between the number of customers and the profits they generate, there is nearly always a strong pattern - in a recent case I was involved in, 19% of customers generated 94% of profits and 104% of ‘true value’. Hard-boiled business folk are always amazed at the results, but they can’t fault them. There is something truly weird about the pattern, and it’s baked into the way the universe works. Whether you look at the broadest possible “macro” level - at the evolution of species by natural selection over millions of years - or at the details of your own life, and you can’t get more specific and “micro” than that, the same pattern applies. So - why not work with the grain of the universe instead of against it? By the way, nobody has yet explained why the principle works, though I think a lot of it relates to network effects. But it certainly does work, and if you order your life to take advantage of the principle, you really can be so much more productive, help people a great deal more, and as a by-product be much happier.

Avi: How can we identify and spend more time on things that really matter?

Richard: My experience and that of the readers who’ve written to me confirms that for most of us, very few things really matter to any individual. I think there is a problem with the modern age and the consumer society because we have been conditioned to think that if we make a lot of money or become famous or buy expensive products, then life will have meaning. But you can’t take meaning from external artifacts or even from the admiration of millions of fans. Meaning is intrinsic and personal. I know many talented and well-meaning people who are wasting their lives working away at objectives and causes they don’t truly believe in.

I make it a personal rule never to do anything that I don’t really care about. It is surprising how much this cuts out. It sounds trite and obvious, but try it. Write down the three to five things in the world that you care most about - they could be people or causes or abstract qualities such as truth and beauty. I doubt that your car will figure on the list. Another test - if you’re not enjoying something, or feeling that it is really important and useful, stop doing it. You have to stop doing things to discover what is truly important.

Avi: What are “Happiness Islands”?

Richard: I encourage people to think about the small chunks of time - this week, this year, the years during their whole lives - that have given them far more happiness than most of the rest of their time. I call these periods “happiness islands”. Try it for yourself. Ask what the happiness islands have in common - why were you unusually happy then. You can do the same for your “achievement islands” - and for the opposites too, the times when you were least effective (“achievement desert islands”) or happy (“happiness desert islands”).

Avi: What’s the importance of choosing partners carefully?

Richard: We are social animals and nothing is more important than the people we spend most time with, and the quality of our relationships with them. Yet most folks accept the choices that are made for us accidentally or by other people - we spend time with work colleagues or neighbors because they are there and we try to get on with them. That is the wrong way round.

One of the great advantages of starting a business or a voluntary group or even a gang is that you get to choose who to include in it. There are thousands, millions or even billions of people out there you haven’t met yet, and a very few of them, maybe just one of them, could add immense meaning to your life. People are not interchangeable. All are unique. Only a few are truly remarkable, warm, outward-looking, and ideally equipped to help make you the best person you could be.

In 1931, a Harvard professor, George K. Zipf, looked at all the marriage licenses granted between people in a 20-block area in Philadelphia. He found that 70 percent of the marriages happened between people who lived within 30 percent of the distance. Later he called this “the principle of least effort” and through a variety of studies showed that 20-30% of any resource tended to account for 70-80% of results. His principle of least effort is clearly a sub-set of the 80/20 principle, and he explained the results by saying that they tended to minimize the amount of work involved. But minimizing work is not the most important criterion when choosing a partner for life, and neither is sexual attraction alone.

One of the few things that matters most is obviously the person (and people) with whom you spend the most time in your life. Think of all those people in Philadelphia choosing someone because they were close neighbors. Maybe there were more suitable people a few more blocks away, or even outside Philadelphia!

Avi: What kind of connections matter?

Richard: I’ve come to realize that one of the greatest adventures in life is meeting the people you haven’t met yet. Focus is important but that doesn’t necessarily mean focusing on what you have now. In my book, Superconnect, Greg Lockwood and I look at the implications of a finding from sociology called “the strength of weak ties” (or “weak links” which is our preferred term). The turning point in so many peoples’ lives - meeting their romantic partner, getting a great new job, discovering a new hobby or idea that becomes an obsession - came about through somebody they didn’t know very well or see very often. In many cases they actually forgot about the person or people who linked them to the turning point. The most valuable information we get doesn’t come from our family and friends, because they have pretty much the information and insights we already have, and not much more.

New ideas and contacts come quite disproportionately from friendly acquaintances, who move in different worlds. Therefore - meet a lot of different kinds of people, and see old contacts from previous lives (old workmates, college acquaintances, former neighbors), and try to connect as many people as you usefully can. By doing them a favor you’ll come into a stream of information and serendipity that, very occasionally, could lift your life to a more elevated level.

Avi: To be an entrepreneur you have to be comfortable with fear and failure. Can you share any tips on how to do this?

Richard: What is the worst thing that can happen to you when you’re an entrepreneur? The venture goes bust and you lose some money. You won’t have lost your time because you’ll have learnt much more than you would doing anything else - you’ll have tested yourself and discovered what customers will and won’t buy. What’s the best thing that can happen? You enrich the world and yourself, and can spend your time doing what you want for the rest of your life. If you fail you learn and if you succeed, well, that’s okay!

So there is nothing really to fear about failure, except fear itself - the worry factor. Frankly, if the business isn’t going well and it’s getting you down - dump it. Failure is fantastic - it stops you wasting your energy and resources, and it teaches you things that success never will. Don’t try and try again at the same venture. Try something different.

Avi: You have an effective technique for dealing with worries!

Richard: Worry is never useful. When you find yourself worrying, stop it instantly. You do this by posing a choice to yourself - either you act and don’t worry; or you decide not to act and not worry.

Avi: What does progress mean to you?

Richard: Doing something that is new and enriches many lives, or doing something ten or twenty times better than what’s available now. The 80/20 principle says that it is always possible to do something much better with existing resources, or with fewer resources. Progress always comes from a small number of people and teams who demonstrate that the ceiling of previous performance can become the floor for everyone. Progress flows from information about exceptional achievement and the spread of successful experiments, from breaking down vested interests, from releasing energy from the great mass of people that so far have not contributed a great deal because they don’t know how or don’t care enough, and from demanding that the standards enjoyed by a privileged minority should be available to everyone. Progress requires us to be completely unreasonable in our demands, from searching out the 20 percent of everything that produces the 80 percent and from demanding a multiplication of whatever it is that we value.

Progress is personal; it comes from individuals demanding more of themselves and everyone else. The greatest aspect of the 80/20 principle is that you don’t need to wait for anybody else. You can start to practice it in your personal and work life. Discover what you are best at doing and enjoy that is different from what all your peers are doing and that requires relatively little effort from you. Then put huge effort into honing that skill, so that it becomes monstrously greater than anyone else’s. Keep demanding that each year you make your peculiar talent more peculiar and much more potent. Use the skill to make the world a more interesting place. Don’t care about making money. If you have a fantastically different and useful skill, everything else you want will follow.

You can take your own small fragments of greatest achievement, happiness, and contribution to others and make them a much larger part of your life. Multiply your highs and cut out your lows. Identify the mass of irrelevant and low-value activity and shed it. Isolate the parts of your character, workstyle, lifestyle, and relationships that use little time and energy and provide great satisfaction - then multiply them. Become a better, more useful, and happier human being. And help others to do the same.