Interview: Richard Koch, author of The 80/20 Principle

Avi Solomon at 4:00 AM Thursday, May 12, 2011

Avi is a technical writer and gardener who lives in Philadelphia with his wife, young son and toddler daughter.

Richard Koch is a businessman and author of the international best seller The 80/20 Principle.

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: 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 of 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: Are there other scientific laws which can help our productivity and wellbeing?

Richard: Yes, I think there are, and I explored those in my book called The Natural Laws of Business in the US. Despite the US title, the laws apply to personal lives as well as business. For example, in the 1930s G. F. Gause, a scientist in the Soviet Union, put two protozoans – tiny organisms – of the same family but different species in a glass jar with limited food. The creatures managed to share the food and both survived. Gause tried the experiment with two organisms of the same species. They fought and both died. This principle of survival by differentiation is at the heart of business and personal success. Businesses and people who make it big are always highly differentiated – they make you aware of what is unique about them. They put all their energy into areas where they are substantially different from any rival, and in some way superior to them. My book looks at a dozen different scientific laws that are useful in business and life.

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 discuss 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 licences 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. 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.

Avi: What advice would you give to a smart kid who’s now in high school?

Richard: 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.

If you want to see the difference between network society and its opposite, you can’t take a better example than Nazi Germany.

In 1930, Germany was a decentralized and sophisticated society full of vibrant networks.  Its regions and cities were self-governing and proud of their independence.  Germany also had well-run trade unions, an army that jealously guarded its independence from the state, Catholic and Protestant schools and churches, a wide array of clubs and friendly societies and of political parties, many ancient and autonomous universities, and thousands of other cultural and civil institutions.  After perhaps Italy, China and Japan, no country in the world had such a rich musical, artistic and academic life.  After the United States, no other country had such widespread and thriving industry and technology.  Germany may well have had a greater profusion and variety of hubs and weak links.

After Hitler came to power in 1933 he put a stop to all that.  He greatly simplified Germany’s network map.  As he made himself a dictator, Hitler closed most of the country’s social and political centres of influence, reducing the country to one centre of power and propaganda.  He cleaned German society of communists, socialists, anarchists, social democrats, conservatives, nationalists, Catholics and all other non-Nazi politicians.  By the late 1930s, gone were the trade unions.  Gone were independent mayors and regional parliaments.  Gone were independent intellectuals, certainly every Jewish one, including Albert Einstein.  Gone were the scientists who were to give America the first atomic bomb.  Gone, to concentration camps, were millions of Jews, socialists, gypsies, homosexuals, and anyone who dared criticize the regime.  And if it appeared that the churches, army and business operated largely as before, the tacit bargain was their acceptance of Nazi tyranny.

All governments that aspire to control of society shut down free networks.  Many organizations are rubbed out or consolidated into state-run mega-hubs.  Spontaneous weak links are crushed.  Stalin, Mao Zedong and Pol Pot did the same.  Dictators multiply the number of degrees of separation between citizens, isolating them from random contact, shoving them into just a few institutions that are part of state apparatus or approved by it.

Freedom and network society – you can’t have one without the other.  Weak links are the friends of both.  Large, powerful and repressive hubs are the enemy of both.

Richard Koch, October 2010

Two good reviews of Superconnect in the past few days have made me think again about networks and poverty.  You can read the reviews in full on this site, but “Courtney” on the Not Oprah’s Book Club ends her review with splendid provocation:

“Interesting, huh?  On the one hand, this network theory shit is a total argument for diversity. I like.  On the other, it reinforces why we remain so economically segregated and why the wealth gap continues to yawn wider and wider.  I hate.”

Her argument is that networking is “one of the biggest sources of division in our society.”  Why?  Because we say in the book, poor people are often excluded from forming the weak links with strangers or casual acquaintances that lead to opportunity.

But we never made Courtney’s leap to the view that networks actually harm the poor.  Could this be true?

In one sense, definitely not.  If I benefit from a network, it does me (and the network) good, but it doesn’t harm anyone.  Life is not a zero sum game – my gain does not come at your expense.  To the extent that any of us is more fulfilled and happier, we will have a positive impact – maybe small, but to a few people highly relevant – on those around us and the world.  Even in economic terms, if I become wealthy, I am likely to create jobs for other people, directly or indirectly. And as people in the past three centuries have become richer than ever before in history, the poor have also become less poor.  A peasant in India today enjoys a hugely greater standard of living than one in India, or even in Europe, three hundred years ago.  In practice, the poor have always had a raw deal and been excluded from most of life’s possibilities – but their fate is less awful today than it has been throughout all of history.  This is not an argument for complacency or lack of social action, but we should not allow moral outrage to cloud our ability to think and be objective.

On the other hand, Courtney is really talking about relative wealth and divisions at a point in time, today.  And the sad fact is that all of us – not just the poor – are more interested in our relative standing in the pecking order than we are in our absolute wealth.  So when divisions stay constant or even diminish in absolute terms, if we are more aware of people wealthier than ourselves, we tend to be miserable.  People in a well-paid firm compare themselves to other people in that firm, not outside.  Divisions in society are also destructive, regardless of their source.  So if most of us are able to benefit from networks, and the poor are not, that is a terrible thing.  I would go further – it is something we should simply not tolerate.

So I will not argue with the Courtneys of this world.  While I don’t reach the same conclusions, I think their hearts are in the right place and in this case the heart matters more than the head.  Let’s concentrate on removing the obstacles that stop the poor from benefitting from networks – removing the isolation and lack of contact with mainstream society that poor people suffer from.  It can be done – and if you are interested, please read or re-read chapter 12 of Superconnect.  And then do something about it! — Richard Koch

Human networks can be deconstructed into three elements – strong relationships, weak relationships, and groups. But does this have explanatory power? Does a common configuration of elements describe a particular social condition? For instance, what does poverty look like in network terms?

Mark Granovetter, the renown Harvard sociologist said: ‘The lower one’s class stratum, the greater the frequency of strong ties.’ That is, the poorer people are, and the more insecure they feel, the more likely they are to seek the protection of strong ties to family, neighbours and powerful employers. A study in Philadelphia confirms this picture – people who are young, [or] poorly educated … rely much more on strong rather than weak ties than the rest of the community. When disgruntled working-class youths want to break away, they may find it difficult to escape the boundaries of their own community. Lacking weak links to acquaintances living in distant parts of the social system, with access to different information, in effect bridges to better worlds of opportunity, they sometimes fall into the gang culture on their doorstep, which may be the ‘best offer’ for social and economic gratification available within their bounded world.

Poverty displays similar characteristics all around the world– in Harlem and New Orleans, in Peru and rural Bangladesh, in Paris and London, in Johannesburg and Detroit. Moreover, the pattern of poverty was much the same in the pre-industrial world, in early America and in the Great Depression as they are today. And they are similar in inner cities, remote villages, ghettos and shanty towns. Being poor is about being confined to limited enclaves, unable to break free, unable to climb up to even the lowest level of property and capital formation. Poverty is about the absence of varied networks, of connections to people who are economically and socially active.

What may surprise you is that other human circumstances share this trademark pattern, the lack of distant links to people with a different experiences, ideas, and opportunities: lack of social mobility; relative difficulty getting a job; a comparative lack of creativity; or a company that becomes set in its ways and is unresponsive to its marketplace. In the end all these things, as with poverty itself, can be described as poverty of information, arising from the absence of the most interesting and undervalued of network elements – ethereal, fleeting, and surprising weak links. — Richard Koch

In my last blog, we saw how wonderful groups are – that collaboration is a marvellous thing, both in its results and also in its intrinsic pleasure.  But groups are also really dangerous to our wellbeing.

In the summer of 2008 the Japanese Ministry of Health certified that a 45-year-old engineer working on Toyota’s Camry project had died of karoshi.  Official Japanese statistics record between 100 and 200 deaths from this disease each year, though unofficial estimates put it over ten thousand. Karoshi means death from overwork.

How alien to Westerners.  But then again, maybe not. Do you know someone who imperilled or sacrificed their marriage for work?  Compromised their values?  Lives somewhere they don’t like?  Or has a miserable life – and makes loved ones unhappy too – through staying in a job or social group too long?  There can be forces acting within hubs that are not in our best interests.

Fidel Castro’s troops stormed into Havana in January 1959 to popular acclaim.  The Batista dictatorship they overthrew was feared and hated.  Originally, Castro was pro-democracy and pro-American.  In April 1959 he visited New York, ate hamburgers and hot dogs with the locals, saying “I don’t agree with communism.  We are against all kinds of dictators.”

But President Eisenhower refused to meet Castro.  Before long, Fidel made overtures to the Soviet Union.  The CIA responded by drawing up a plan to topple him.  When he became President in 1961, John F. Kennedy gave the invasion plan the green light.  Fourteen hundred Cuban refugees were to land at the Bay of Pigs in Cuba, which would be the start of a popular rising against Castro.

The invasion happened, but the anticipated popular revolt did not.  Castro’s forces easily defeated the invaders, while in Havana the victory was widely celebrated.

This came as a real shock to the American intelligence community and to Kennedy and his advisers.  Yet curiously, before the invasion, Princeton’s Institute of International Social Research had conducted an opinion poll in Cuba, finding “overwhelming allegiance to Fidel Castro.”  They survey was published and copies sent to the US government.  The findings were completely ignored.

Watergate presented a similar tale.  When five employees of CREEP, the Committee to Re-Elect the President, were arrested trying to break into the Democratic National Headquarters on 17 June 1972, President Nixon and his close advisers were not unduly alarmed.    They were running a massive slush fund out of Mexico, financing campaign fraud, spying and sabotage, and the fund could easily cover buying the burglars’ silence.  Nixon won a landslide victory in the 1972 election, and it was only through a series of accidents – and through Nixon bugging his own conversations in the White House – that Nixon was eventually forced out of office.  On 9 August 1974 he became the first US president to resign.

But the really interesting thing about Watergate is that for two years none of Nixon’s inner circle dissented or shown any signs of regret or conscience.  They were all hugely loyal to the President and admired his work.  Even Henry Kissinger, the distinguished Secretary of State who was not involved in Watergate, predicted that history would forget about the affair and view Nixon as a great president.

What the Bay of Pigs and Watergate exemplify is ‘groupthink’ – the desire for unanimity, when thinking alike becomes a virtue; the division of the world into ‘us’ and ‘them’; the insulation of the group from all outside evidence; and a belief that if the groups sticks together, it can shrug off outside criticism.  Groupthink is not thinking at all, but an emotional quality.  It is the extreme form of empathy, of people bonding together.  It is a paradox that groups of highly intelligent people can make such stupid decisions.  They would not have made them as individuals.

Beyond groupthink, there is authority.  As psychological experiments have shown, we naturally defer to authority, even at the expense of our humanity.  Another dark force that multiplies within groups is conformity.  Most of us don’t like to rock the boat.  Then there are all kinds of reasons why we may be reluctant to leave a group even when we know it’s bad for us.  Which leads to overwork, to compromising our principles, and to corporate cults of various kinds.

Groups appear to exert “gravity” – a force that binds us into the group and makes it hard to break free.  We become afraid to take an independent line.  We may spend months or years working or living in a group where we are unhappy and don’t feel useful.  The worse hubs are often firms, where economic and emotional forces combine to tug us in malevolent ways.  Being wired to connect may mean we’re just not wired to disconnect.  Empathy, loyalty, consensus and shared values – all wonderful things – come to have horrible consequences.

We are not as powerful as individuals as we like to think we are.  But if we are aware of the gravity of hubs, we have a better chance to break free.  Unhappiness or a guilty conscience can be repressed.  An infinitely better solution is to leave the group immediately.  There are so many groups with which we can choose to collaborate.  We can even set up our own formal or informal group.  It pays to be as discriminating in our choice of hubs, and as demanding of them, as they are of us.  We can experiment, to find groups where we are truly part of the same network in body, mind and spirit, where we share the same values and aspirations, and where our individuality is not curbed, but rather enhanced. — Richard Koch