The 80/20 and 95/5 Rules of Change
Have you heard of the Pareto principle, also called the 80/20 rule? It is fundamental rule of foresight you should understand. Scholars know it by a more arcane title, the power law rule. Power laws describe the distributions of variables in many natural complex systems. In systems subject to power laws, 80% of the effects come from 20% of the causes (picture right). For example, 20% of the citizens in many capitalist economies have 80% of the wealth, 20% of cities have 80% of the population, 20% of the titles in the bookstore get 80% of the sales, and when we are solving problems, 20% of the effort (highest priority actions) often get us 80% of the results we seek. This 20% is called the “fat head” of the power law. Conversely, the remaining 80% of the citizens, cities, books, and problem solving activities, while they hold the vast majority of diversity, contribute only 20% of the impact on many natural variables. This 80% is called the “long tail” of the power law.
In simpler terms, the “fat head” in any power law-dependent community of actors self-organizes to generate impact, and the “long tail” self-organizes to generate diversity. As we’ll see later, this rule tells us a basic, universally common relationship between processes of evolution and development. Both ends of the power law curve are very important to see and to cultivate, depending on the system’s and the leader’s priorities, impact or diversity.
This rule is obviously very important for foresight. It challenges us look for power law relationships, and for that small number of actions and strategies that will generate the most impact. It also challenges us to be aware of, and to sustain, a wide range of alternatives to our current actions and strategies, as any one of those could become the “fat head” tomorrow, if our competitive environment changes. For more, Richard Koch’s books The 80/20 Principle (1999), Living the 80/20 Way (2004) and The 80/20 Manager (2013) offer great advice on using the 80/20 rule in life and management. Another very good book on the use of power law strategy in marketing, focused on the 80%, is Chris Anderson’s The Long Tail (2006).
The 95/5 rule is another basic and universal relationship between processes of evolution and development. It is much less widely known than the 80/20 rule, but no less important. The 95/5 rule describes the interaction between possible (unpredictable) and probable (predictable) processes in natural systems, including humans and our technologies, which are also becoming natural systems, as we will see.
In biological organisms, roughly 95% of our genes engage in unpredictable evolutionary recombination. Just like the long tail of the power law, these evolutionary genes pursue the chaotic creation of diversity, and the exploration of the possibility space of form and function. The remaining 5% of our genes (to a rough approximation in eukaryotes) are involved in predictable developmental conservation. Just like the fat head of the power law, these genes have self-organized in their environment for a special kind of predictable impact, that which advances the development of the organism.
We can observe this 95/5 rule, a 95%/5% evo/devo, bottom-up/top-down, divergent/convergent, unpredictable/predictable ratio, in a wide variety of complex systems in nature. Let’s look briefly at a few examples, to see the breadth of operation of this rule:
- Genetic activity. A very small subset of our genetic material, roughly 5%, is ‘ultra-conserved’ across complex organisms like humans, mice, and rats, and central to the way those organisms converge, top-down, on a series of future-predictable states over their life cycles. For example, everything that happens predictably the same to identical twins over their lifetime is due to that very small and special set of developmental genes and processes, our ‘developmental (or ‘evo-devo’) genetic toolkit.’ But the vast majority of genes in living organisms, the other 95%, are constantly changing, and work in a bottom-up fashion to allow each organism to be different from the next, in unpredictable ways, from both its neighbors and all the organisms before it. See my article Evo Devo Universe? (2008) for details.
- Human thinking. Leonard Mlodinow describes a 95/5 ratio in Subliminal (2013) when he explains that the vast majority (perhaps 95%) of human thinking is bottom-up, creative, and unpredictable, driven by our unconscious synaptic networks. Only a critical subset (let’s guess, 5%) of human thinking is top-down, optimization oriented, and conscious. Psychologists measure this “conscious” or “deliberate” time in minutes out of a typical day, versus hours we spend in largely unconscious, bottom-up, and locally-driven behaviors.
- Organizational dynamics. Kevin Kelly describes the 95/5 rule in Out of Control (1994) when he explains that the vast majority of decisions made in organizations (again, say 95%?), even in highly hierarchical ones like the military, happen in bottom-up, creative ways, based on the initiative and judgment of individual actors. Leaders try to set up fair and useful top-down rules and directives (the 5%), but the time and energy people in most organizations spend paying attention to those directives, versus making their own bottom-up decisions, is likely as short as the conscious vs unconscious thinking we do in a typical day.
- Ideas for change. Robinson and Schroeder, in The Idea-Driven Organization (2014) show that the great majority of ideas for change also flow from the bottom-up, from employees, stakeholders, and customers to upper management, rather than vice versa. Whether those ideas are listened to or not is another matter.
- Social processes are subject to the 95/5 rule as well. If most social processes are 95% evolutionary and only 5% developmental to a first approximation, this helps us understand why it is so easy to see creative and unpredictable evolutionary “noise” around us, and so hard to see convergent and predictable developmental “signal”. Some scholars make the classic mistake of concluding that all social change is bottom-up, random and unpredictable. But as we will see later, the 5% of developmental processes in any complex system, few as they are, are at least as important as the 95% of evolutionary processes in shaping the future, in living systems, social systems, and the universe as a system. Even though they are in a small minority, developmental processes have a huge influence on the futures of biological organisms.
We’ll see more examples of this rule in Chapter 11. The 95/5 rule tells us that the vast majority of change is evolutionary, but a critical subset is the opposite. We need to see both, in order to do good foresight work.
Consider the rule’s implications for organizations. In adaptive organizations, only a critical subset, something like 5%, of organizational activities are driven by top-down commands and constraints, the initiatives and rulesets provided by leaders. The vast majority of change always happens instead in local, bottom-up contexts, subject to individual choice and initiative. This fact of nature is why overcontrolling an organization from the top quickly becomes a recipe for employee disengagement, inflexibility, and predatory power politics in top management. At the same time, a lack of critical frameworks and rulesets at the top is a recipe for anarchy and lack of direction.
There’s a great rule, Hanlon’s razor, which says “Never attribute to malice that which can be explained by stupidity.” The risk manager Douglas Hubbard offers Hanlon’s corrollary: “Never attribute to malice or stupidity that which can be explained by moderately rational individuals following misaligned incentives, norms, processes or policy in a complex system.” Amen! Such systemic bias in our top-down rulesets causes many of our social, organizational, and team problems. Maintaining well-designed incentives, norms, processes and policy may be only 5% of the job of management, but getting that 5% right is very important for preventing organizational dysfunction.
Frederic Laloux’s Reinventing Organizations (2014) is book that recognizes primarily bottom-up controlled, people-centric organizational structures work more like biological systems, and that these are usually more adaptive in more environments than are top-heavy hierarchies, which work best only when control, not innovative diversity, is the overriding concern. Laszlo Bock’s Work Rules! (2016) also takes this perspective. It describes Google’s experience with OKRs, a bottom-up form of people management in which individual employees determine their own objectives and key results to be measured against those objectives, and those roll-up to their managers, rather than having performance standards set in a mostly top-down manner, as in older organizations, for slower-paced times. In a slow-moving environment, a manager’s top-down regulations and control initiatives can grow easily grow past the 5% that is most adaptive, most of the time. But as John Kotter argues in Accelerate (2014), as the pace of change quickens, the performance cost of top-down hierarchies keeps growing, until it threatens firm survival, and is shattered by competition into more bottom-up networks, either by internal reform, or more commonly, by bankruptcy, merger, and downsizing of the too-top-heavy firm.
Knowing the 95/5 rule, and seeing it at work in human and other systems, is a great aid to foresight. Throughout this Guide, and in our chapter on evo devo foresight, we will argue that just as important as seeing our evolutionary opportunities, risks, options, and alternative futures is understanding and taking advantage of the small subset of social processes that are top-down, optimizing, convergent and highly probable, our developmental futures. Both the possible and the probable, the “evo” and the “devo”, appear equally important to life, to society, and to the universe itself.
As it says in the subtitle, this Guide will help you become a better leader in Anticipating (seeing probable futures), Creating (exploring possible futures) and Managing (steering toward preferable futures) change. We’ve listed these three skills in a particularly useful order. As we will see, anticipation is the foundation of good foresight. The more thinking you and your team do about relevant high-probability trends, the more predictable future outcomes you will also discover. Those trends and outcomes will usefully constrain, guide, and empower all your other foresight activities.