Accumulative advantage: why a few people get more of the rewards in life.

At one point in the 19th century —nobody is quite sure exactly when—an Italian named Vilfredo Pareto was idling in his garden when he made a small but intriguing discovery. Pareto noticed that only a small fraction of his pea pods were responsible for the majority of the peas. Pareto was an economist. And unlike many economists of the time, his papers were filled with equations. The peas in his garden had ignited his mathematical intrigue and set off one of the lasting legacies of economics. At the time, Pareto was analysing wealth distribution in various nations. As a resident of Florence, he began by analyzing the distribution of wealth in his home town; then in all of Italy; then in other countries. To his surprise, he discovered approximately 80 per cent of the land in Italy was owned by just 20 per cent of the people. Like the pea pods in his garden, most of the resources were controlled by a minority of the players. As he continued his analysis in other nations, a pattern began to emerge. For instance, after poring through the British income tax records, he noticed that approximately 22 per cent of the population in Great Britain earned about 81 per cent of the total income. Pareto found that while the numbers were never quite the same, the trend was remarkably consistent. The majority of rewards appeared to accrue to a small percentage of people. This idea that a small number of things account for the majority of the results became known as the Pareto Principle or, more commonly, the 80/20 Rule. Beyond Pareto's example, concentrated accumulation exists in everything. Three per cent of Guatemalans own 70 per cent of the land. 8% per cent of the world population controls 83% per cent of the world's wealth. Why this happens is straightforward, but not immediately obvious. To illustrate, take the Amazon rain forest: one of the most diverse ecosystems on Earth. There are approximately 16,000 different tree species in the Amazon, but despite this remarkable level of diversity, there are just 227 “hyper-dominant” tree species that makeup half of the rain forest. 1.4 per cent of tree species account for 50 per cent of the trees in the Amazon. This is the result of millions of iterations of the following: imagine two trees growing side by side, each day they compete for sunlight and soil. As one grows just a little bit faster than the other, it can stretch taller, catch more sunlight, and soak up more rain. This additional energy allows the tree to grow even more. The pattern continues until the stronger tree crowds the other out and takes the lion’s share of sunlight, soil, and nutrients. From this advantageous position, the process continues: the tree has a better ability to propagate seeds and reproduce, which gives the species an even bigger footprint in the next generation. This process gets repeated again and again until the trees that are slightly better than the competition dominate the entire forest. This is accumulative advantage. What begins as a small advantage gets bigger over time. One tree only needs a slight edge, in the beginning, to crowd out the competition and take over the entire forest. The same thing happens in our lives. Humans are often competing for discrete and finite resources. Politicians compete for the same votes. Athletes compete for the same gold medal. Companies compete for market share. The difference between winning or not can be razor-thin, but the winners enjoy massively outsized rewards. A few additional votes and one politician is empowered where many others are not. 1/100th of a second faster results in athletic victory. Two-hundred candidates jostling for the same role, but being just slightly better earns the entire position. A little bit better than the competition secures the entire reward. These situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects. They typically occur in situations that involve relative comparison, where your performance relative to those around you is the determining factor in your success. Not everything in life is a Winner-Take-All competition, but nearly every area of life is at least partially affected by limited resources. Any decision that involves using a limited resource like time or money will naturally result in a winner-take-all situation. In situations like these, being just a little bit better than the competition can lead to outsized rewards because the winner takes all. You only win by one per cent or one second or one dollar, but you capture one hundred per cent of the victory. The advantage of being a little bit better is not a little bit more reward, but the entire reward. The winner gets one and the rest get zero. Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life. What began as a small margin is starting to trend toward the 80/20 Rule. The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds with each additional contest. Winning one competition improves your odds of winning the next. Each additional cycle further cements the status of those at the top. Over time, those that are slightly better end up with the majority of the rewards. Those that are slightly worse end up with next to nothing. Small differences in performance can lead to very unequal distributions when repeated over time. You only need to be slightly better than your competition, but if you are able to maintain a slight edge today and tomorrow and the day after that, then you can repeat the process of winning by just a little bit over and over again. And thanks to Winner-Take-All Effects, each win delivers outsized rewards. Interestingly, you don't need to be twice as good to get twice the results. You just need to be slightly better. This is not merely a reference to the fact that small differences accumulate into significant advantages, but also to the idea that those who are one per cent better their respective fields and industries. Therefore, the process of accumulative advantage is the hidden engine that drives the 80/20 Rule. And why a few end up with most.