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Jul 13-Jul 17, 2020 

 

a look back at this week’s essays…

 

Pareto Principle, Part I:

The Secret of the 1%

It may be the most important idea in economics – but it also applies to science, to sports, and to human behavior. It explains not only why things are the way they are, but also why, no matter how you try, it’s almost impossible to change them.

Welcome to a series of essays on the Pareto Principle!

Click here to read more.

 

 

The Pareto Principle, Part II:

A Universal Law That Even Applies to Business 

I don’t remember exactly when I first read about the Pareto Principle, but I’m certain I did not grok it early in my career. It wasn’t until I was running a multimillion-dollar company in which I had secured a profit share… and there’s a good reason for that.

Click here to read more.

 

 

The Pareto Principle, Part III:

Entropy and the Impossibility of Equality 

When I was young, the campaign for equality was about the protection of equal rights under the law.

Today, the call for equality is very different.

Click here to read more.

 

 

what I’m reading 

 

Alchemy: The Surprising Power of Ideas That Don’t Make Sense by Rory Sutherland 

Rory Sutherland understands marketing. But he understands more than that, too. Alchemy is a fast read for marketing professionals, replete with philosophical observations and humor that makes the reading great fun, even for the most seasoned marketing professional.

Check out this online interview with Sutherland here.

A few testimonials:

“This is a breakthrough book. Alchemy is wonderfully applicable to about everything in life. Furthermore, it is funny as hell.” – Nassim Nicholas Taleb, author of The Black Swan

“So many of us are trained to focus on data and the logical, and Alchemy makes a great argument for the irrational. I think everyone could use a reminder that asking dumb questions, reframing old ideas, and, in turn, trying to create a bit of magic, can lead to unexpected solutions for some of our most difficult problems. Alchemy was a reminder of that and then some.” – Inc., “Great Books for Anyone Who Wants to Get Ahead in Life”

“Sutherland, the legendary Vice Chairman of Ogilvy, uses his decades of experience to dissect human spending behavior in an insanely entertaining way. Alchemy combines scientific research with hilarious stories and case studies of campaigns for AmEx, Microsoft, and the like. This is a must-read.” – Entrepreneur, “Best Books of the Year for Entrepreneurs”

“Buy this book. I loved it. It’s full of great insights.” – Matt Ridley, bestselling author of The Rational Optimist and Genome

 

 

recommended links from this week’s blog 

 

* The latest issue of AWAI’s Barefoot Writer – Click here to read the July issue.

 

* Jeff Allen on “Understanding Your Love Language” Here

 

* There are 8 musical terms that every music lover should know. Click here for a good explanation of each one.


* “This Is Where Your Wine Corks Come From” Here

 

* “How to Bleed in the First Line” by James Altucher – Click here to read the entire essay.

 

* Here’s more consumer advice from the FTC.

 

* Fun stuff from the Guggenheim Museum’s Works and Process project…here.

 

 

Q&A 

 

Your Question: 

What do you attribute your success to? Could you narrow it down to just a few main reasons? And based on your experience, what would you say are the main reasons that most people fail to succeed?

One more question: If you could give people like me your best 3 pieces of advice, what would they be?
– RT

 

My Answer: 

Your questions are all interrelated. I’m going to answer them this way:

 

  1. Three things that helped me be successful 

* Want. I grew up as one of eight children, living in a small house across the street from the RR tracks. I wore hand-me-down clothes, drank powdered milk, and worked four hours a day on Saturdays for a weekly allowance of 33 cents. In grammar school, this seemed normal. But in high school, I became acutely aware of and embarrassed by my family’s modest circumstances. This embarrassment fueled a lifelong desire to become more than I was. In short, being a have-not was, for me, a great gift.

 

* Commitment. My desire to be successful was always there, but I never achieved anything extraordinary until I realized that desire alone was not enough. There were plenty of people around me with the desire to succeed. Some of them had more talent. Many of them had more resources. Some were physically more attractive. (Don’t kid yourself – a big advantage!) And some were, although I hated to admit it, smarter. To succeed – to get myself to the front of my imaginary pack – I had to change my behavior. I had to commit to three things: I would work harder than anyone else in my peer group. I would become more knowledgeable than any of them. And I would get more things done – more things that mattered.

 

* Help. I have no doubt whatsoever that my desire and commitment alone would have been enormously helpful in advancing my career. But things began to move so much faster after I humbled myself enough to be mentored by several people that taught me things about work and life that it might have taken me decades to learn on my own. I don’t believe you need many mentors. One is good. Two or three are fantastic. Looking back at my career as I approach my 70thbirthday, it’s easy to see that I had four great ones: my mother, who gave me my contrarian nature; my father, who gave me my ethical values; JSN, my former boss and partner, who taught me how selling works; and BB, my current partner, who taught me (and is still teaching me) that the opposite of every true thing is also true.

 

* Wisdom. I’m not sure if anyone taught me this or if I somehow knew it. But it has been clear to me for as long as I can remember that you can accomplish much more in life if you set, as the purpose of your work, something that is outside of yourself. As an employee in business, that meant working to grow the business I worked for, not to get the business to pay me more. I knew that if I made myself invaluable to my boss, he’d take care of me. Later, in developing partnerships in every sort of project and business, I always had that same idea: Make it work for the other person first and it will come back to you.

 

  1. The three biggest reasons people fail to succeed 

 

* Ignorance. We are all ignorant in the beginning. To become knowledgeable about anything, you must accept the fact that you don’t know and put in the time to know. It takes between 500 and 1000 hours to become competent in any complex skill or career, and 5000 hours to become a master. You have to be committed to constant learning.

 

* Laziness. We are all lazy, naturally lazy. Being lazy is the source of creativity. We want to get what we need or want by working as little as we can. The problem with this is that if you give in to laziness, you will never achieve anything important. You will always be one of the pack. To be super-successful, you have to be willing to work much harder than the average person. You have to work hard for 60 to 80 hours a week.

 

* Arrogance. Many smart, hardworking people make advances but then hit a plateau. This often happens because they make the mistake of thinking that they are special. They believe that they know better than anyone else. They feel that they are “the smartest person in the world.” The smarter and more successful you are, the more  important it is to be humble.

 

  1. My best advice – three recommendations 

* Read The Pledge.

* Then read Automatic Wealth.

* Then read Ready, Fire, Aim.

Hope this helps!

 

 

Have a question for me? Submit it on our Contact Us page.

 

 

For a look back at the stock market, click here

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The Pareto Principle, Part III:

Entropy and the Impossibility of Equality 

“If you don’t like something change it. If you can’t change it, change your attitude.” – Maya Angelou

 

Let’s talk about the Second Law of Thermodynamics…

The Second Law of Thermodynamics states that “the entropy of a system never decreases over time. Instead, systems evolve towards thermodynamic equilibrium, which is the state of maximum entropy.”

In layman’s terms, this means that everything in the universe has a natural tendency to fall apart. To become less structured and more chaotic.

And by ”everything,” I mean everything: the galaxies, the solar system, and the Earth. The Earth’s oceans and mountains, its countries and cultures, its denizens, molecules, atoms, and subatomic particles.

In our day-to-day lives, entropy is the reason that absolute order – in anything – can never be maintained. As James Clear, author of Atomic Habits, explains, there are simply so many more ways that things can go wrong than right:

“Imagine that you take a box of puzzle pieces and dump them out on a table. In theory, it is possible for the pieces to fall perfectly into place and create a completed puzzle when you dump them out of the box. But in reality, that never happens. Mathematically speaking, an orderly outcome is incredibly unlikely to happen at random.”

 

Entropy and Equality 

Let’s switch topics for a moment and get back to an idea that we looked at in Part I of this series. [LINK 7/13] I’m talking about the idea of equality and the current global movement to achieve equality in economics, governance, education, and even health.

When I was young, the campaign for equality was about the protection of equal rights under the law. The law was based on the Constitutional thesis that all men are created equal and are thus endowed with the unalienable rights of life, liberty, and the pursuit of happiness.

Today, the call for equality is very different. It is a call for equality in terms of outcomes. The logic is that inequalities in desirable circumstances – e.g., income or social standing – are inherently bad.

(Please notice that I am not addressing the “why” argument advanced by post-modern leftists: that the cause of inequality of outcomes is “systemic” racism and gender bias. We don’t need to address that for the purposes of this discussion.)

Question: How does this idea of equality – this ideal of equal outcomes – work in the real world? How does it fare in a discussion that accepts the validity of one of the most important laws of physics?

Answer: Not very well.

Let’s start with this…

Equality is about order. It’s about balance, aesthetic preferences, and, for many people, ethics: how things should be.

But from the perspective of the Second Law of Thermodynamics, it’s easy to see that it is an impossibility. Actual equality – in any form whatsoever – is a state that is contrary to that law. Nature is designed to destroy it. Its chances of existing in any system (anything, anywhere) are one in a trillion. And if, by chance, some state of equality occurred, it would be dissolved in a nanosecond because of entropy.

As applied to wealth, equality is an idea that we may find appealing. We can, if we want, make it an ideal towards which to strive. But the effort, however great and sustained, will be futile. Because the universe, as I said, will not tolerate it.

Imagine wealth equality as an acre of landscaping – a patch of perfection that you create in a tropical jungle. If you worked 24 hours a day trimming, fertilizing, watering, and otherwise tending to every blade of grass, you might be able to maintain its perfection for a while. But the moment you took a nap, the jungle would reclaim its rightful domain.

Consider the many historical revolutions that occurred to (at least partly) establish economic equality. What happened with them?

In every single case, it was the same. The revolutionary leaders (who were mostly upper- or upper-middle class) replaced the former rulers (also mostly upper- or upper-middle class). Most of the wealth of the ejected class was claimed for “the people,” but stayed in control of the new rulers. A sprinkling of that wealth was dusted on the poor. (Which did them no economic good at all, as their numbers, as a percentage of the population, did not diminish.) The laboring class continued on as the laboring class. The big losers were usually the merchant class – the entrepreneurs that were responsible for the wealth that existed. They paid the bill. (No need to believe me now. I will prove it to you in a future essay.)

My big point is this: Attempts to equalize wealth have never worked. The inequality that was so unbalanced before the revolution was always – after a year or so – equally unbalanced after the revolution. The only difference was that some of the faces at the top changed.

 

Once again, the Pareto Principle :

This, of course, gets us back to where we started: the 80/20 Rule, a.k.a. the Pareto Principle.

We have established that in virtually every free market economy (and even most controlled economies), there is an inequality of wealth ownership/control that is roughly 80/20. And we have wondered why that is.

My idea is this: Pareto’s Principle “works” because it is aligned with the Second Law of Thermodynamics, one of the most universal principles of physics. The Pareto Principle is, in fact, a mathematical ratio that roughly describes the natural state of entropy.

Put differently, the Pareto Principle tells us that with respect to wealth, the universe wants there to be an imbalance that is roughly 80/20. And that, however much we try to equalize wealth through legislation and economic incentives, nature will do everything it can to achieve this preferred equilibrium.

 

So what? 

You may find my little proposition repugnant. The notion that inequality is nature’s preference rubs against the grain. It argues with your better instincts. You want to dismiss it out of hand. You find it absurd.

I get it. But I think the evidence is on my side.

Two questions I’ve been trying to answer since I got on this train of thought:

  1. Why would nature want entropy to be the standard? Why would the universe be designed to move from order to disorder? It seems like the wrong direction.
  2. If the universe is programmed to move towards disorder, why do people keep trying to create order? Why do we continue to try to improve our lives? Why are we always trying to make everything better?

For the moment, I have only two weak answers to these questions.

Why is the universe falling apart? It’s not really falling apart. It’s expanding. Falling apart is how it feels when you are a tiny part of it. For you, things are always out of order. But for the universe, things are moving as they should – outward.

Why do we keep trying to create order out of chaos? Why not just give up and go with the flow? Because it’s just the way we are. Homo sapiens is a peculiar animal. It is 99% the same as all other animals, but 1% different. And that 1% has to do with our undeniable and unstoppable instinct to change and improve things.

Whether it’s a question of how we find shelter or feed ourselves or protect ourselves, the history of Homo sapiens is the history of one of 100 million animals trying to create change.

And that, to me, explains the current ideal of equality in the US. Since the old standard of equality under the law has been largely attained, social justice warriors now are clamoring for a new standard: equality in outcomes. Today, if you are some version of a thinking ape and equality is your subject matter, you are being pressured to advocate for this change… regardless of whether it makes any sense in terms of the Second Law of Thermodynamics or the Pareto Principle.

It’s not going to work. But you can try. And if you do, you will likely feel virtuous – righteous and morally superior.

If you try very hard, you may be able to change the wealth inequality ratio from 80/20 to 70/30 or even 60/40. But remember this: The new equilibrium will last only for a brief moment in time. Because the very second you achieve that bit of change, everything in nature, including the people you are “trying to help,” will begin the relentless move back to nature’s comfort zone. Which, thanks to Vilfredo Pareto, we understand.

 

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