Every venture capitalist knows there is nothing more important in a new business than its people, and that the people can make a difference of thousands of times to its future value.  That’s all very well in practice, but how does it work in theory?

Nobody has really explained the paradox that individuals can’t be many times as intelligent as one another, and yet that in business at least they can add thousands of times difference to results.

I’m going to try to explain how and why.

Just how valuable are truly great people?

How much better – in terms of adding value – would you expect the best people to be compared to the rest?  Fifty percent better?  Twice as valuable?  Four times?

If someone in your business were twice or four times as useful as another employee, it would clearly be worth paying a large premium for their services.

Yet the 80/20 principle suggests that the best twenty percent of any peer group is likely to be at least sixteen times as valuable as the other eighty percent.

Sixteen times?!

Imagine a group of 100 people produce 100 units of output.  If the most productive produce 80 percent of the value, that is, 80 units, then one of those 20 people will produce, on average, 4 units (80 divided by 20 is 4).

And if the 80 percent of less productive people produce a total of 20 units, each one of them will produce just 0.25 of a unit – 20 divided by 80 is ¼.

This can be expressed as:

Vital group (20%)        80% results/20% people         = 4.00

Trivial group (80%)      20% results/80% people         = 0.25

Ratio of vital group to trivial group                            = 4.00/0.25      = 16

Remember that the vital group itself is an average, and that one or two of that group may be 50 or 100 times better than the average of the 100 people.

Is a Difference of 16 Times Credible?

Differences in measurable intelligence follow a bell curve, not an 80/20 pattern.  The top twenty percent-of-intelligence people are not twice as smart as the rest, let alone 16 times brighter.

80/20 does not apply to intelligence, and therefore not to talent, which is a form of intelligence (arguably talent is applied and focussed intelligence, with the benefit of high accumulated experience).  But intelligence and talent are not everything, and when it comes to results, they may be closer to nothing.  Those of us interested in success and the creation of wealth and well-being should not be interested in talent per se. Talent may be a wonderful thing, not least to its possessor, but unless it leads to wealth or well-being, it doesn’t concern us here.

Why does 80/20 persist so strongly in wealth generation?  Survey after survey, whether in the US, other countries, or the world as a whole, shows that year after year, generation after generation, the top twenty percent of people by wealth or earnings account for between eighty and ninety percent of total money.  A century of progressive tax policies, where the rich pay a higher proportion of tax than the rest, has not been able to overturn, or even dent, the 80/20 principle’s sway over income distributions.

So how do we reconcile psychology and economics, the bell curve and the persistently skewed 80/20 distribution?   Both arose empirically; both are well proven.  The answer is crystal-clear:

Koch’s Law of Individual Wealth Creation

The answer is that the bell curve and the 80/20 principle refer to different things.

The bell curve refers to intelligence and talent; whereas 80/20 refers to the ability of people to generate wealth and well-being.

The old jibe at professors – if you’re so smart, how come you’re not rich – is nonsense.  Intelligence and money-making are two almost completely independent things. And they obey completely different empirical laws – the bell curve, and the 80/20 pattern respectively.

Two insights follow:

  • Talent is not enough. Talent is useless to other people if it doesn’t create wealth or well-being. We should therefore ask what alchemy converts talent into wealth-making.
  • Contrary to our expectations – and even perhaps to our sense of what is right and proper – 80/20 does apply to the wealth-creating abilities of individuals. The iron mathematics of the principle apply.  The top twenty percent of wealth-makers create at least 16 times more than the rest of the population.  And at the very top of the distribution, this difference in the ability to create wealth or well-being can be in the thousands or even millions of times differences between individuals.

Lionel Messi and Cristiano Ronaldo are not 16 times more intelligent than other top professional footballers.  Though it is very hard to measure, they are probably not even 16 times better on the field.  Yet their ability to generate wealth, for themselves and their teams, exceeds other players by a huge multiple, well in excess of 16 times.

By translating talent into wealth creation, and converting psychology into economics, leverage occurs.

My Law of Individual Wealth Creation helps explain why:

Wealth = (Talent) x (Wealth Creation Multiple)

There is something, a separate variable, which converts talent into wealth or well-being. Of the two variables, talent on the one hand, and the wealth creation multiple on the other, the latter is plainly far more important.  It is a multiple, a number more than two and often astronomically higher.  Because it varies far more than talent does – because the 80/20 principle is more lop-sided than the bell curve – the wealth creation multiple is vital.

But what is the wealth creation multiple?  That really is the $64 million question.  Are there any general rules which determine and define the wealth creation multiple, or is it random, multifarious, or mysterious?

That would be telling.  The answer is that the wealth creation multiple can be defined, so that we can have a general rule as to how to convert talent into wealth creation.

For that, however, you will have to wait fourteen days until my next blog post.

But still, if you have followed the argument and agree with it this far, there are some practical corollaries:

Action Implications

  1. If talent is a side-show, don’t worry about it. Be concerned about how to generate wealth or well-being.
  2. The generation of wealth or well-being does not obey the bell curve. Some people can and do generate hugely more than others.  So aim very high.  As the result is not much constrained by your talent, raise your ambitions.
  3. Try to work out for yourself, in the specific narrow area where you are going to try to whip up tremendous results, what the Wealth Creation Multiple may be – I don’t mean the number, but what causes it. I’ll give you my general answer in my next post, but try to think for yourself what the answer may be in your own field.  Look at people you know or can find out about who have been fantastically successful in what you would like to do.  How do you think they did it – and don’t use talent as the alibi.  If you focus on talent you will be inhibited, and come to the wrong answer anyway.

See you in two weeks and until then, thanks for reading this, and happy thinking!

The ideas in this post come largely from my book The 80/20 Individual.  If you want to know what the Wealth Creation Multiple is, and can’t wait two weeks, look at page 98 of the book.

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  1. SO enjoy your thoughts on life and business

  2. Hi,
    in my new short ebook (about personal develoment idea), I quote you : “Knowing the best use of your energy is more important than working harder or longer” and add an amazon’s link to your book.

  3. As usual, Richard dropping some serious knowledge. Thanks for digging into this, looking forward to your breakdown of WCM next post.

  4. Patrick C says:

    Has it been 2 weeks yet? :-).
    Exciting post, Thank you!

  5. Nice to see the emergence of Koch’s Law of Individual Wealth Creation!

    Very interested to see what the Wealth Creation Multiple is. Imagine Peter Thiel might wright it as something like:

    Wealth = Talent * New Value Created * Value Captured

    Where Talent means execution or the application of productive skills; New Value Created means total market value generated from action and Value Captured is the amount the individual or company captures and keeps. Look forward to finding out

  6. I am drooling with anticipation. Not sure I’ll last the two weeks.

    You have an amazing ability to generate great questions. This one’s been banging around the back of my mind for a while, but I had not thought to articulate it this well. Thank you.

  7. Hi Richard. I would love to see a post from you on blockchain / cryptocurrencies. It seems that many of the principles of star companies and network stars can be applied to evaluating these technologies. If you look at Etherium for example, it is a clear network star. It allows for other companies to create smart contracts, applications, currencies and businesses on top of its platform. Bitcoin is the star digital currency by market cap but is loosing market share. There are lots of altcoins that are vying to be leaders in their own high growth niche (Monero in privacy, IOTA in internet of things etc) and the space is moving at incredible speed. With a phenomenal amount of speculative money flowing in in 2018 fortunes will be made and lost. An 80/20, Star Principle take on this would be fascinating.

    Useful reference article:

  8. Nothing new to my beliefs, but profoundly different to my thinking.

    My big daily lesson is this: Don’t underestimate what you know in a better communicated format. It can really change your mind!

  9. Great article! Wealth creation is certainly attributable to more than talent alone, even average or mediocre talent. Certainly, focus and leverage of a skill, unique capability, knowledge, information, and with a bit of luck sprinkled in has something to do with it. I look forward to reading your next post.

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