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Wednesday, April 20, 2011

Pareto's Principle?

Hello all, long time no see.

I got my graded business stock project back today, and comparing it to others in the class left me thinking about Pareto's Principle. I'll come back to this example, first a bit of background on the Principle.

Pareto's Principle, otherwise known as the 80/20 rule or the law of the vital few (or for the economics nerds, the Principle of Factor Sparsity), is a concept seen everywhere in our world - 80% of results come from 20% of the effort. It originated with Vilfredo Pareto in 1906 when he noted that 80% of the land in his home country of Italy was owned by the wealthiest 20% of the population. Joseph M. Juran later applied it to quality control (80% of your problems come from 20% of your causes) and named it Pareto's Principle. Today, most people generally know about the Principle either through school courses or through the spread of Tim Ferriss's works (the 4-Hour Workweek and the 4-Hour Body). To keep it short and sweet, the LifeHacking community LOVES Pareto's Principle. Why? Because if correctly applied, you can get a lot of results for a little effort - that's something I can really get behind.

But how does this apply to my Business project, you ask? Let's take a look, shall we? I'll put mine up against two other projects that stood out to me. Quick FYI: The project entailed playing with $200,000 of fake money - $100,000 invested in stocks of our choice and the other $100,000 invested in an index containing our stocks.
- My Project was in a plain paper folder, and had little Post-It tabs to make reading/grading slightly easier. The writing quality was pretty spot on, but most of my analysis was my thoughts instead of quantifiable percentages and values. I had the required graph of the success of my portfolio compared to a similar amount of the relevant index (in this case, the NYSE Index), but also several optional graphs (one charting the price of each of my 4 stocks). I did most of the project without advice from the professor other than his preferred formatting of the pages. Much of the hard work (making graphs, assembling the pieces of the project to form a cohesive whole, etc) was done the night before.
- My neighbor's project was spiral bound with a slick cover. It had several embedded images and graphics to better illustrate his decision process. His tabs were built-in instead of Post-It notes like mine. I didn't get a good look at his project, but it looked like something a company would put out to shareholders for an annual statement - again, very slick. I heard him speak with the professor many times over the course of the project, he was clearly keeping close tabs on his portfolio and working hard over the ~ 9 weeks.
- A guy across the room was really on his game. He had three graphs for each stock and his individual write-ups for each company were about 1.5 pages each, while mine were confined to a page with a large graph. His project was also very polished, with a lot of attention to detail and obviously a lot of time spent over the project period. Different quantified analyzes were EVERYWHERE. Our professor hinted that he figured this guy put in the most effort overall out of the entire class.


So, now the grade rundown. My project: 91. Neighbor: 94. Crazy-effort guy: 99. At first it may seem like I'm a slacker, but let's really put this in perspective. The lowest grade in class: 70. Average grade (not sure what method he used to determine "average," but I'm assuming either mean or median): 89. Highest grade: Crazy-effort's 99. So all of a sudden, I'm running with the big dogs with considerably less effort than they put in. Hmmm.... 2 points over the average, guesstimated 20-30 hours less work than the higher grades I pointed out. Not an exact 80/20, but the idea remains the same.

What have I learned here? Focus on what Ramit Sethi calls the "Big Wins" in the personal finance realm, the victories that hold the most weight. I could have bumped my grade up 2-3 points by spending a lot more time adding graphics, keeping close watch on my stocks, or going out and putting my report in prettier packaging - but that doesn't interest me. I have a solid A in the class already, and I would get little joy out of putting so much time or money into so little results. Most people would start by making things pretty, but that's not me. I'll stick to my relative expertise - clear and supportive writing, and a clean look sans embedded graphics. And I'll walk out of class with an A report in hand and a smile on my face.

2 comments:

  1. Cool stuff. What kinds of principles apply to those super-elite like crazy-effort guy? I know Gladwell's "The Outliers" book that discusses some of these things.

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  2. In terms of Pareto's Principle, "crazy-effort" simply made more use of the 80%. Juran actually changed the rule from "the vital few and the trivial many" to "the vital few and the useful many," suggesting the value of that 80%.

    How was "Outliers?" I've been wanting to read it for a while now.

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