Deeper Dive - The Pareto Principle and Price's Law in Action - October 11, 2022
The Boys of Summer are putting the bats and gloves away for the Winter; can we see the Pareto Principle in Action?
An End of the Season
Last week, the regular season of Major League Baseball ended. The season is marked by lasting over half the year and each team plays 162 games a year. The local team didn’t do that well; the Cincinnati Reds were 62-100. For just the second time in their long history, they lost 100 games in one season.
One thing that becomes clear in a 162 game season is that there are a lot of things that happen and those that happen are usually counted. Baseball, perhaps more than any other sport, is filled with statistics. If you have ever read Moneyball by Michael Lewis, you can get an idea of how these numbers have always been a part of the game and new numbers are seemingly being invented all the time. All of this in the quest to find the best baseball team that can bring home a championship.
The Pareto Principle
Most people have heard about the Pareto Principle. The Pareto Principle is roughly called the 80/20 rule. Generally speaking, the principle is a theory claiming that 80 percent of the output from a given system or team is determined by 20 percent of the input. A similar rule is Price’s Law, which is a bit more exact. Price’s Law generally says there is a relationship between an output on a team and the number of contributors, stating that half of the output come from the square root of all contributors.
So, do these principles add up? Well, a game laded with lots of statistics like baseball should help us see if these rules actually exist right? Well, let’s take a look. We will look at two basic baseball statistics, one for batters and one for pitchers.
Digging into the Statistics
In 2022, collectively the Cincinnati Reds collected 1,264 hits. Those 1,264 hits came from 32 batters that registered an at-bat. Using the Pareto Principle, we would expect that the top 20 percent (6 batters) to collect 80 percent of the hits (1,011). Using Price’s Law we would expect the square root of those 32 batters (5.6 batters - we will round up to 6) to collect half the hits (632).
So, how did it end up for the batters? The top six hitters for the Reds in 2022 were Kyle Farmer (134), Brandon Drury (96), Jonathan India (96), Nick Senzel (86), Tommy Pham (81) and Donovan Solano (79). Collectively, these top six hitters had 572 hits for them — or 45% of all the team’s hits. At least in this case, Price’s Law seems to be a bit more accurate than the Pareto Principle.
Now, let’s look at the pitchers. For the season, the 38 hurlers for the Reds collected 1,414 strikeouts. Under the Pareto Principle we would expect that top 8 hurlers to collect 1,131 strikeouts and we would expect under Price’s Law that the top 6 hurlers would get 707 strikeouts. Last season, the top strikeout pitchers for the Reds were: Hunter Greene (164), Nick Lodolo (131), Tyler Mahle (114), Luis Castillo (90), Alexis Diaz (83), Mike Minor (76), Graham Ashcraft (71), Hunter Strickland (60). These eight hurlers struck out batters 789 times; not exactly the 1,131 we would expect under the Pareto Principle. Under Price’s Law, those top six hurlers punched out 658 batters, much closer to those 707 strikeouts - in fact, those six pitchers earned 47% of all the team’s strikeouts. That figure is awfully close to the same percentage of hits.
Okay, so what does this matter to me?
Other than exercising our math muscles, what does all this really matter? Well, for those in the nonprofit world and philanthropy it can matter quite a bit. Think about those people that give to our organizations. If we look at Price’s Law, it’s probably not a stretch to think that half our dollars come from the square root of all donors. If we raised $100,000 last year from 100 people, it’s not a surprise that 50% of that funding comes from 10 people. In fact, if you are building a giving pyramid for your organization, this is where we would start.
On the other side, think about the dollars we spend in nonprofits or the outputs that we measure. If we have nine programs, most of our outputs are going to come from three programs. Half of our money is going to spent on those three programs. Sometimes, new leaders to nonprofits see this and they start to get a little nervous. They think that they need to spread the resources out better, make things more equal. If you try to do that, it’s like taking two similar poles of a magnet and trying to make them stick — it’s not going to work.
These principles and laws are there to help explain the world and there is a lot of wisdom we can gain if we just see these things in action and understand where they come from. Where does this come from? Well, many believe it’s actually biblical:
“For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.” Matthew 25:29
I have shared my thoughts, what are yours? Feel free to leave a comment or “hit the heart”. It is much appreciated!
Onward and Upward,
Bill