Business

Adrian Gore warns against a common error with serious implications

Adrian Gore

Discovery CEO Adrian Gore said it is crucial for leaders to realise human activities follow a Pareto distribution instead of a Gaussian curve, also known as a normal distribution.

Most people view the world and people’s activities as a normal distribution, where there is a more frequent occurrence near the mean than far away from the mean.

A good example of a normal distribution is IQ scores. Most people will have IQ scores around the mean of 100, with very few people recording scores very far away from the mean.

Approximately 68% of the individuals have an IQ between 85 and 115. In comparison, only 0.3% of individuals have a score below 55 or above 145.

The same goes for height. The average American male height is 5’9, and 50% of the population has a height within 2 inches of this mean. However, only 2% are shorter than 5’1 or taller than 6’4.

Intuitively many people think a normal distribution for most things in this world – like wealth distribution and medical claims – should follow a normal distribution.

Gore highlights that it feels fair and predictable when most people are clustered around a stable average. It also pleases our liking for symmetry.

However, it is a mistake to think that human activities have a normal distribution. In fact, they follow a Pareto distribution – also known as the “80-20 rule”.

It is named after Italian economist Vilfredo Pareto, who observed that 80% of the country’s wealth was concentrated in the hands of only 20% of the population.

It goes far beyond wealth. In its general form, the Pareto principle states that roughly 80% of consequences come from 20% of causes.

Gore said in business, 80% of revenue and profits typically come from 20% of products and services.

In health care, the sickest 20% generate 79% of health care costs. Within this 20%, the sickest 20% generate 60% of total costs.

An even more extreme example comes from Twitter, where 25% of the most active users accounted for 97% of all tweets.

With many human activities and disciplines following a Pareto distribution, Gore urged leaders to recalibrate their perspective from a normal distribution to Pareto.

“The realisation that we live in a largely Pareto world — inherently unfair, asymmetric, and unpredictable — may feel unpleasant at first,” Gore said.

“The upside, however, is that systemic change in such a world is much easier and faster.”

The practical implications of this different perspective are profound.

“In Pareto distributions, a small change in one variable is associated with a large change in another,” Gore said.

Referred to as a “power law”, it reflects variables multiplied with each other rather than added to each other.

It created tremendous opportunities in all spheres of life.

Shifting a bell curve or normal distribution is very difficult because you have to shift the mean or the whole curve.

To shift the long tail in a Pareto world will drag the average with it and modifies the system. “You can shift the tail with just a few remarkable creative individuals,” Gore said.

“A few key decisions — from whom we marry to what careers we choose — end up having an enormous impact on our future,” he said.

“I believe our thinking follows the same power law. By correcting a handful of cognitive errors, starting with this one, we can radically transform our performance, our impact, and our entire life.”

Adrian Gore’s full article about the Pareto distribution and how leaders should change their thinking is available on the Harvard Business Review website – We Need to Let Go of the Bell Curve.

Pareto principle in sport

The Professional Darts Corporation’s (PDC’s) Order of Merit provides a great example of the Pareto principle in sports.

The PDC Order of Merit is based on prize money won over two years by players in ranking tournaments.

The top 20 players in the PDC Order of Merit won more than the rest of the professional darts players combined.

Over the last two years, the twenty top players have won £9.74 million. The other 162 players on the professional darts tour only won a combined £6.80 million.

The top player, Peter Wright, won £1,216,500 over the last two years. It is double what the bottom 100 players won combined.

The same happens in other sports. In tennis, for example, over 80% of grand slam titles over the last twenty years were won by only three players – Rafael Nadal, Roger Federer, and Novak Djokovic.

It shows that the relatively small advantage top players have over the competitors significantly impacts the number of tournaments won and prize money.

The chart below shows the PDC order of merit prize money won by ranked players, which follows a Pareto distribution.

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