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Power law and the pareto principle are definitely very related, but I think one is an instance of the other. I'd argue that power law is one manifestation under
by jackaltman 14y ago
Power law and the pareto principle are definitely very related, but I think one is an instance of the other. I'd argue that power law is one manifestation under the umbrella of pareto principle, as compared to a stepwise function where 80% of actions/people/whatever act one way, and then another class of 20% act dramatically different from the 80% but similar to each other.
VC fund returns aren't driven by 80/20 (although they may fit that description), but by the much smaller number of outliers.
- minimax 14y agoYou have it backwards. The Pareto principle is based on a Pareto distribution with specific coefficients. The Pareto distribution is a power law distribution. Ergo the Pareto principle is based on a power law distribution. There is nothing stepwise about a Pareto distribution. Maybe VC returns follow 80/20 and maybe they don't. It isn't exactly a public dataset that we can readily get our hands on. The point I was trying to make in my original comment was that although power law distributions seem to be a popular topic of conversation for the past few years, they aren't exactly a new discovery. Given that wealth and income follow a Pareto distribution, perhaps it isn't that surprising that VC returns do too.
- jackaltman 14y agoYou're right, we shouldn't be surprised that VC returns looks like this, and it's well known that they do. The point I'm making in the post is that more mundane things our lives may look like this than we expect. Pareto power laws can't be stepwise, the point I was trying to make is that 80/20 distribution can be, and they are related to but not necessarily the same as power laws.