A Universal Rule in Work & Life

What's up, everyone. This is Alex Lieberman, co-founder and Executive Chairman of Morning Brew. Welcome back to Founder’s Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today, I am walking you through a universal rule that drives results in life, work, investing and business. Let's hop into it.

Pareto and his Principle

So let me give you some quick history. Late 1800s, early 1900s, there was this Italian engineer-slash-economist-slash-sociologist named Vilfredo Pareto. And in 1906, Pareto came up with this concept of Pareto Efficiency. And the idea was that resources are allocated in an economically efficient way, but that doesn't mean they are fair or equal. Sounds like a lot of jargon. I'll explain it. What Pareto first noticed was this concept in his garden. He noticed that 20% of the pea pods in his garden were responsible for 80% of the peas that actually were grown. He then took this idea and expanded it into a far more macro idea that 80% of wealth in Italy was owned by 20% of the population. This observation ultimately became known as the Pareto Principle and is known by some as the 80/20 rule. Interesting enough, Pareto Principle, even though it's named after Pareto, was not coined by him. It was coined by this guy, Joseph Juran, Dr. Joseph Juran and in the 1940s, basically Juran had applied Pareto’s observations from the Italian economy and from his garden. He applied this concept to operations. And what Joseph Juran said was businesses, 20% of their methods, basically the things that were being done to produce things in a business, especially a factory business, 80% of product defects were coming from 20% of these methods. And so that's why he was a pioneer in operations. The 80/20 rule or the Pareto Principle can be observed in so many parts of life. And the main idea is that 80% of consequences come from 20% of causes. And as I thought about examples to explain Pareto Principle, I could literally think of an example in every facet of my life. And I want to walk you through a few of these examples and then how we can apply our awareness of the 80/20 rule in a way that helps all of us grow.

It’s the 80/20 rule, but it’s flexible

And by the way, I personally don't take the 80/20 rule so literally. Like, I don't look at everything and think about how 20% exactly of the input necessarily drives exactly 80% of the output. I more just think of this as a mental model of a small amount or minority of things drives a big amount or a majority of things. Basically there's a power law in a lot of areas of life. 

Pareto Principle in your personal life

So let's start with actually just life, personal life. I have found that 80% of the value that I get from socializing comes from 20% of my friends. And this reality has pushed me to be more aware of which close friends give me energy, versus which close friends take energy from me. And I try my best to shift time towards fewer, but more quality connections. And it's hard in practice, right? You like, you hear this, but it's hard when you've had a lot of long friendships, you've accumulated friendships over time, but it is a very necessary choice to make and thing to be aware of, if you truly want to focus on quality friendships, over quantity of friendships. And I also find this same sort of principle is applicable to my happiness. 20% of my actions lead to 80% of my unhappiness. And so what I do everyday, I mentioned this in a recent episode, but I take 10 minutes to freehand journal every single day, and to reflect on the last 24 hours, what went well and what could have gone better. And whenever I'm reflecting and I feel like I was depleted, or I regret something from the previous day, it usually relates to one or two activities in my day. And generally those activities are either eating junk food, not exercising, or scrolling through social. And not just doing these activities, but not doing them with any sort of moderation. Now, it sounds so simple, but having the self-awareness that 20% of my actions, so these three things I just mentioned dictate 80% of my unhappiness, clearly the thoughtful thing for me to do is focus on fixing those 20% and not necessarily worrying about the rest. 

Pareto Principle at work

Now let's bring it to work. Same rule applies. 80% of my procrastination comes from 20% of my indulgences. And this is especially true for me. When I'm not working smart, it's either because I am scrolling through social media, I'm checking my email, or I am eating food. It's probably actually like 95%, not 80% for me. Similar to the personal activities that create unhappiness, I should obviously focus on the few things that have the most outsized impact on my productivity. For me, as I mentioned in the recent episode, on my nine rules for working smarter, I've literally had my fiancée set a new passcode on my iPhone so I can not access my phone during the day. It sounds ridiculous. It sounds desperate. It sounds like I can't control myself, but I have found that it has had a massive impact on my productivity because being on my phone has such an outsized impact on when I'm goofing off. So what's the rule for you? Place your two to four top indulgences out of arm's reach, literally eliminate them so they're not a choice and you will see an outsize gain in your output. 

Another work-related application of the 80/20 rule is the truest version of input and output when you think of Pareto’s Principle. For most people, 20% of the work you do is responsible for 80% of your value and impact as an employee, which means it's your job as a worker to figure out what are the one-to-two things every single day that must get done above all else to move the needle. We've been brought up in a society where creating long to-do lists are like the thing to do, but they're a distraction. And instead becoming great at prioritizing the 20% of actions that drive 80% of value is so much more important. And for me, in my work, those things are finding creators to join Morning Brew and thinking through the biggest challenges in the business, alongside my co-founder Austin. If I help with these two things, it will drive 80%, probably more of my value to the business. 

Pareto Principle in business

Now let's shift this to business, whether it's startups or corporations and away from just productivity and work. I have found this fact that I'm about to share with you true for running my own business and I believe it to be true for most businesses: 20% of your employees drive 80% of your profits. Is this a bad thing? No, because this isn't to say that more than 20% of your employees, aren't talented. It just means you have a certain group of A-plus players that have an outsized impact on your business. And while you should worry about building talent density as a company, which is this concept created by Netflix in their culture, to me, the bigger lesson here is making sure you never lose your A-plus players. Even if it feels like you have to spend a stupid amount of money to keep them. They likely pay for themselves, not just in their ability to put out great work, but also in making everyone around them better. A-plus plus players want to work with A-plus players. We also see the Pareto Principle come to life in the business models of many companies. And this is especially true in gaming. There's this concept of whales and gaming and whales are basically power users who spend hundreds, thousands, or millions of dollars on things like booster packs and cosmetics in games like Fortnite or other free-to-play games. And a recent stat blew my mind: .15% of gamers are responsible for 50% of monthly revenue in mobile games. Now these are examples in life, productivity, and business, but we see Pareto Principle in so many other parts of society. You hear angel investors talk about how their portfolios follow a power law and how a very small minority of their investments will hopefully deliver a majority of their returns. You hear wealth disparity talked about in this way, where as of 2021, 10% of the population held 70% of wealth in the country. Now what makes Pareto's principles so powerful is again, less the exactness of 80/20 and more of this idea of 20% of inputs driving 80% of outputs. It is the definition of a power law, which leads to the big lesson in all of this: Whether it's picking up on the pattern and angel investing that led to a few small businesses driving outsized returns so you can be a better picker in the future or noticing what made the top 20% of your employees so freaking good that they generated 80% of the output or profit in the business so you can get better at hiring these people moving forward, finding threads and creating focus on the 20% that creates the 80% can be an amazing framing for learning really important lessons and better optimizing our resources and our time. 

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And that is the Pareto Principle, a 100-year-old mental model that is as relevant today for decisionmaking as ever before. Now, if you found this concept helpful and think it could help your co-workers or friends be more thoughtful in their work or their life and their relationships, please share the link to this episode with them. Word of mouth is how we grow this show. As always, thank you so much for listening and I'll catch you next episode.