Sunday, February 01, 2009

Don't Be In The 80%

I used to love listening to CBC Radio but after Morningside's Peter Gzowski, Vicki Gabereau and of course Finkleman's 45's left, my heart did too.

Instead I've tuned into BBC Radio. Recently heard on BBC Radio 5 live 'Phone In Programme' discussing the world economic recession:

Caller: 'Thanks to my financial adviser I now have a small fortune.'

Presenter: That's very interesting, tell me more.

Caller: Pause……………..

Caller: 'Mind you, I started off with a large fortune.'

Just a little joke to put a smile on your face.

Remember Pareto's law? 80% of people are frozen (in this case) fear, while 20% are out there investing (in action).

The Pareto principle states that, for many events, roughly 80% of the effects come from 20% of the causes. It was named after Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population.

The original observation was in connection with income and wealth. Pareto carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied. Because of the scale-invariant nature of the power law relationship, the relationship applies also to subsets of the income range.

Even if we take the ten wealthiest individuals in the world, we see that the top three (Warren Buffett, Carlos Slim Helu, and Bill Gates) own as much as the next seven put together.

The Pareto Principle also applies to a variety of more mundane matters: one might guess approximately that we wear our 20% most favoured clothes about 80% of the time, perhaps we spend 80% of the time with 20% of our acquaintances, etc.

As you follow the news, remember to step back and see how the 80/20 rule plays out. There are plenty of good deals out there that 80% of the people are missing.

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