Our Trade-off Life: How the 80/20 rule leads to a healthier, wealthier life
Updated: Aug 20
Trade-offs are the currency of decision-making. The French philosopher Voltaire spoke of trade-offs when he said [i]:
"Perfect is the enemy of good."
We make trade-offs all the time, sometimes those trade-offs are more obvious and sometimes they are almost invisible. In the modern decision-making context, decisions are the optimization of multiple "what is important to you or us" criteria. The "best" decision is the alternative that optimizes the weighted criteria. [ii] Rarely, if ever, are all criteria "the best." There are always trade-offs, especially with making healthy choices. This article provides a generalizable trade-off framework suitable for today's complex decisions. In the business context, this article provides a decision-making foundation. Helpful health and wealth examples are provided. Today's healthy decision usually includes assessing criteria trade-offs. These trade-offs often involve optimizing health benefit and healthy habit compliance.
"Just do it" is a wonderful slogan encouraging achievement. We must be mindful to set ourselves up for "just do it" success. Approaching life through a practical trade-off lens is important for long-term success. This article provides an approach and examples to achieve the most benefit with an achievable "just do it" mindset. We suggest practical tools -- also known as "choice architecture" -- to help make complex decisions consistent, repeatable, and easy.
About the author: Jeff Hulett is a behavioral economist and a decision scientist. He is an executive with the Definitive Companies. Jeff teaches personal finance and the decision sciences at James Madison University. Jeff is an author and his latest book is Making Choices, Making Money: Your Guide to Making Confident Financial Decisions. His experience includes senior leadership roles in banking and bank risk consulting. Jeff holds advanced degrees in finance, mathematics, and economics. Jeff and his family live in the Washington D.C. area.
Table of contents:
Introduction
Today, we are not naturally good decision-makers
A Healthy Trade-off: Use the 80/20 rule to set achievable "just do it" objectives
Background
Healthy habits
Pareto case studies
A personal finance example
A personal health example
An injured loved one example
Conclusion
Resources
Definitive Choice
Definitive Pro
Notes
2. Today, we are not naturally good decision-makers
The operative word in the section title is "naturally." Our focus of this article is to help you overcome our natural decision deficiencies to become great decision-makers!
Personal finance and personal health are just 2 examples involving important life decisions impacting long-term success. These and other examples share the reality that long-term success occurs decades after high-impact decisions needed to be made. [iii] These are particularly complex because they involve time trade-offs. Time trade-offs include the give-up-a-little now to earn a significant pay-off in future decisions. People lack the natural capacity to handle time uncertainty. Our neurobiology, as a result of evolutionary biology fine-tuning, makes us naturally very present-focused. If you think about it, for tens of thousands of years, your ancestor stayed alive long enough to have a family by successfully acting upon super important, life-sustaining questions like: "Should I run from this lion?" Thus, that present-focused "fight or flight" decision-making was hard-wired into our brains. The fact that you are reading this means that your entire line of ancestors successfully ran from the lion! [iv]
Today, unless there is a jailbreak at the local zoo, we rarely make these sorts of very important but simple binary decisions. In fact, modern laws and medicine have virtually eliminated short-term existential threats. The vast majority of modern people can safely live until they are old enough to have children. However, that ancient decision-making wiring is still present in our DNA. We are naturally very good at making mostly unnecessary-for-our-modern-world decisions.
On the flip side, our brains are NOT wired to intuitively make today's necessary complex, multi-criteria, multi-alternative decisions. Without assistance, this may lead to poor decision outcomes. In fact, because our brains are naturally wired to make fast, life-saving decisions, that wiring often works against the slower evaluation process needed for making complex, multi-criteria, multi-alternative decisions. The difference between ancient brain decisions we are naturally good at and modern, difficult complex decisions present as cognitive biases. Our cognitive biases hinder us from properly saving for retirement or from keeping healthy New Year's resolutions. [v] It is our evolutionary biology working against us!
In this article, health and wealth are the exemplary decision-making categories. But almost all decisions will benefit from using this trade-off-enabling approach.
3. A Healthy Trade-off: Use the 80/20 rule to set achievable "just do it" objectives
a. Pareto Principle Background
Vilfredo Pareto was an Italian economist. [vi] He introduced the concept of the Pareto Principle, otherwise known as the 80/20 rule. Think of the Pareto Principle as a framework for today's common trade-offs. This started in the social sciences and economics context. Pareto demonstrated there was a consistent, repeatable relationship between population and wealth. In 19th-century Europe, approximately 20% of the population owned about 80% of the land. This non-linear "power law" concept is regularly observed in many social systems.
The Pareto Principle in action: In the business context, often "80% of sales come from 20% of the clients" or "almost 80% of the clients use 20% of a company's products." Sports are also impacted by the Pareto principle.
Baseball and the Pareto Principle. According to the Baseball Almanac and Major League Baseball, the 2022 league batting average was .243. This means the hitter was successful about 24% of the time. In 2022, 70% of batters achieved at least a .243 batting average. This represents an almost 80/20 split -- where 70% of players achieve average batting success about 24% of the time. It is likely that no single governing body calculated the best baseball rules to achieve this (almost) 80/20 rule. In the case of baseball, competitive rules like salary caps evolved to create a competitive trade-off environment that optimized the outcomes for all baseball parties based on their collective trade-offs. Thus, the trade between the market participants looks like this:
The players trade their baseball skills to make income and enjoy a team sport,
The owners trade their capital and baseball knowledge to make income and enjoy running a sports business, and
The fans trade their income to be entertained and enjoy a team sport.
A win for all! The essential point is, the Pareto Principle is the typical outcome of a stable market.
The Pareto Principle, while not always exactly 80/20, is a great rule of thumb to apply to many human behavior situations requiring trade-offs. In the not-as-exacting social sciences and human behavior, the Pareto Principle is analogous to mathematical constants like Pi or e.
Another way to look at it -- when people are free to choose their individual trade-offs within a stable system, the individual trade-offs will aggregate to converge on an 80/20 systems outcome.
b. Pareto Principle and Healthy Habits
In the case of healthy habits, we want to avoid bad habits. But then the question becomes "What healthy habits should we seek?" We have choices about how to implement healthy habits. Just look at a typical New Year's resolutions list:
Improved mental health (45%)
Improved fitness (39%)
Lose weight (37%)
Improved diet (33%)
Improved finances (30%)
Courtesy of Forbes Magazine
A common mistake is when people initiate the "perfect" or "best" diet or the "most rigorous" exercise routine or savings and investment program. The problem is, those "bests" often have higher rates of non-compliance. [vii] That is, people will start with great intentions, but discontinue the great healthy behavior and return to the bad habit. On average, people do not stick with their New Year's resolutions. As in the earlier baseball example, think of your exercise benefits and compliance ability as trade-offs just like the trade-offs for baseball fans deciding whether to go to an upcoming home game. Non-compliance with healthy habits is a big problem. In the context of decision-making, deriving value from a healthy lifestyle change is a TRADE-OFF with compliance with the healthy lifestyle change.
So what would Pareto do? Pareto suggests there is an in-between point between bad and great.... this is a good habit. Good habits are where you achieve 80% of the benefit, but are also much more likely to stay compliant. When creating healthy habits, my suggestion is to start with good habits. But most importantly, a good habit is a habit you are likely to maintain. Then, over time, you can move to an even better habit once you establish "good."
Let's walk through the diagram:
Expected Value: In the previous diagram, notice the non-linear, Pareto-like nature of the "Bad - Good - Great" group descriptions along the horizontal desired outcome dimension.
While "Great" provides an opportunity to achieve 100% of the value, you have a low chance of achieving that value.
(Under the "Great" tab, the blue value triangle is higher at almost 100%. However, compliance with the "Great", as shown by the orange circle, is only about a 20% probability.
As such - a 100% valuable program times only a 20% chance of compliance approaches 20% expected value)
"Bad" is at the other end of the spectrum. "Bad" is easy to achieve but provides almost no health value.
(Under the "Bad" tab, the blue value triangle is almost zero. There is an almost 100% probability, as shown by the orange circle, of achieving that bad outcome.
As such - an almost 0 value program times an almost 100 chance of compliance approaches 0% expected value)
The optimal point is "Good," where you achieve 80% of the value at a much high 80% chance of compliance and developing long-term healthy habits. "Good" is often superior to "Great" because of the non-linear nature of how more likely we are to comply with "Good."
(Under the "Good" tab, the blue value triangle is 80% times an 80% chance of compliance shown in the orange circle is a higher 64% expected value)
Decisions at the margin: In the world of economics, moving from good to great often runs into a value optimization challenge. Economists view the world through the marginal cost and marginal benefit lenses. To optimize value, the marginal benefit must be greater than the marginal cost.
Bad to good = Yes: Going from bad to good, the marginal benefit is greater than the marginal cost. (80% marginal benefit > 20% marginal cost or chance of not complying)
Good to Great = No: However, moving from good to great often runs the risk that the marginal benefit is smaller than the marginal cost of achieving that marginal benefit. (20% marginal benefit < 80% marginal cost or chance of not complying)
The following is a graphical summary of the Pareto Principle outcomes on many life decisions:
Thus, in the typical Pareto Principle model, good is the optimal stopping point. [viii]
A fair personal assessment: To be fair, how each of us defines Bad, Good, or Great plus our individual compliance discipline is intensely personal. There are some people with a high likelihood of implementing a great solution. Since people have many different activities to prioritize - like personal health personal and finance, another consideration is the importance of that activity. High-importance activities may get more of your attention, thus, making it more likely to comply. Most important is to be honest about your ability to attend to a life activity in order to achieve a great outcome! Behavioral science teaches us that less salient activities such as the examples in this article are notoriously difficult for most people to prioritize. A good outcome is SO much better than bad!
The business context: Some business leaders may wish to go from "Good to Great." Jim Collins, the author of the book by the same name, certainly thinks so. The business world is constantly faced with trade-offs. As a business grows, there are always more ideas for projects than there are resources to implement them. Business decision criteria and project alternatives are always in need of trade-offs. The point is to be hyper clear about business strategic objectives. The most strategic business driver alternatives should be prioritized. Do most strategic alternatives reach "great" when first implemented? No. But over time, they may reach "great" or "great-ish' with on-going focus. However, there are many business alternatives that are necessary but less strategic. These are important to stop at "good" and divert resources to other strategic projects.
Let's face it, the world changes. Perhaps a project that was originally viewed as highly strategic. Over time, the project either:
Turns out to be far more difficult to achieve that strategic objective than originally thought or
Far less strategic today than it was when the project was begun.
In the resource section, process tools are suggested to help evaluate the degree to which project alternatives are strategic, and, processes to help businesses adapt as the business environment changes.
Next, personal case study examples are provided. They may certainly be considered conceptually relevant to the business world.
4. Pareto case studies
a. A personal finance example
We all intend to keep debt under control. However, some people find themselves in situations where they have too much, high interest-rate debt. If you find yourself in debt trouble, there are choices for how to reduce that debt.
The “Great” debt repayment solution and what some economists would call most rational is 1) ranking your debts from highest interest rate to lowest interest rate and 2) starting to repay with the highest interest rate first. This is the most rational because it is the highest interest rate that causes the highest relative expense. So, a great solution is to pay that debt first.
You are probably already asking the right question. “What about compliance?! How likely is the debtor to repay this way?” You are correct to question! Crushing debt is psychologically challenging. The person is feeling significant resource scarcity pressure that creates a challenging-to-comply environment called tunneling. [ix] Non-compliance with the debt repayment program is a valid concern potentially leading to bankruptcy.
The “Good” debt repayment program is one that increases the chances of compliance. Personal finance personality Dave Ramsey recognizes that people run the risk of being rational but non-compliant. As such, Ramsey recommends the "debt snowball" method to extinguish the debt. [x] The debt snowball method focuses repayment energy on extinguishing the smallest balance debt first. In Ramsey's method, creating positive debt payment momentum and confidence is more likely to give you motivation and will help you finish your debt repayment journey. The debt snowball method may not be mathematically optimal compared to paying the highest interest rate debt first. However, it will be more effective from a behavior change standpoint. Less rational and more compliant is certainly a positive outcome! By the way, an achievable “Good” debt repayment program is consistent with the behavioral economics-promoted "commitment device." A repayment approach encouraging commitment or compliance is a good thing!
Upon building confidence and making repayment a habit, the debtor may certainly switch to the great method and pay higher interest rate debt first. But notice, we started with the good method to ensure compliance.
b. A personal health example
Smoothies can be a staple of your morning nutrition routine. For a variety of reasons and with the proper multi-nutrient recipe, they are very good for you. The biggest challenge with smoothies is to minimize sugar. Fruit is often a core smoothie ingredient. Raw fruit has natural sugar called fructose. But other ingredients, like orange juice and yogurt, may have excess sugar additives, which are helpful to avoid. I suggest people start with smoothies with a level of sweetness that tastes great. Liking the taste of the smoothie from Day 1 will greatly improve the chances that the smoothie breakfast will become a habit. It may start with higher levels of added sugars. But this still falls in the "good" category compared to breakfast with fatty and difficult-to-digest breakfast meat, sugar-additive cereals, and carbohydrates. However, over time and once the smoothie habit is routinized, you can slowly reduce sugars.
This is how you move from good to great. Notice, we did NOT start at great. As the smoothie habit builds, it will make it easier to move up the value curve to the slightly less tasty, lower-sugar smoothie. In fact, over time, you will start to develop a taste for less sweetness... which is a great thing! I call this habit-building approach to health: "Boil Your Own Frog" Please check out the citation for details about my smoothie recipe and approach to boiling your frog! [xi]
Healthy habits, like finances, diets, and exercise programs are very faddy. Many fads seem to come and go. There are many companies seeking to help you achieve health goals with their "best" system. People are naturally drawn toward the "best." Often, unfortunately, at the cost of other "good" alternatives. Most important: DO WHAT WORKS FOR YOU TO ACHIEVE LONG-TERM HEALTH. Health, whether financial, body, or mind, may be achieved with a portfolio of good alternatives. Making health a habit should be your first priority, not the "best" this or that health program.
Many people struggle with stopping at good. People naturally desire to reach great. In the timeless words of the 19th-century economist and sociologist Thorstein Veblen, he said:
“Invention is the mother of necessity.”
Read this quote again -- the words, “necessity” and “invention” are in the reverse order of what you may expect. Veblen’s pithy word reversal reminds us that people are naturally insatiable. Stopping at good is very difficult for most people. [xii] Decision process, called "choice architecture," is an essential ally to achieving the best decisions. In the following resource section are examples of easy-to-use tools to achieve health and wealth in your personal and business life.
c. An injured loved one example
When it comes to Pareto thinking, the rubber hits the road when it comes to medical procedure decisions. Pareto thinking is all well and good until intense emotions impact our decision-making. Medical procedure decisions involving loved ones is when you find out whether Pareto thinking has been truly internalized.
Imagine a loved one, like a close family member, is in a car accident. They are injured and need surgery. It is a significant injury where time is not a friend. The longer we wait, the higher the risk of a bad outcome. If you are the responsible family member, like a parent, your priority response is likely to:
Do a deep dive into the google rabbit hole to drain available knowledge on the particular injury,
Interview medical professionals and others to gather information.
Seek out the best surgeon possible to perform the surgery.
You may already anticipate how Pareto thinking could impact this typical priority response. The first 2 priorities make sense. Good decisions are born from curated information. The 3rd ‘best’ surgeon priority is where we need to flex our pareto muscles.
The best surgeons are more likely to cost you time and money. Time – because the surgery may need to be delayed until the “best” surgeon is available. Since ‘time is not your friend’ – a time cost increases risk. The financial cost of the best surgeon may be significant. If they are out of your insurance network, their cost may be much higher than an in-network surgeon. What if the patient does not have insurance? Also, if the ‘best’ surgeon is out of the area, the transportation and other logistical costs may be significant.
Your first response may be – “Health is too important! Only the best for my loved one!” Ok, let’s test that response:
Let’s say there are 3 kinds of surgeons
Bad surgeons → inexperienced or surgeons with spotty records.
Good surgeons → competent surgeons with a variety of related experience and good outcomes.
Best surgeons → stellar reputation, wrote the ‘book’ on the surgery, wins awards, etc.
The human body, especially of younger people, is very regenerative. Most people are fulsome healers. Most important is to perform surgery that activates people’s healing powers. Thus, the surgery outcome needs to position the patient to heal. The body will do much of the healing heavy lifting. So if both a good and a great surgeon position the patient to heal, they may be equivalent relative to the expected patient outcome.
Every medical situation is different. Emotions have tremendous impact on the medical decision process. Emotions contain judgment. Emotions also contain bias.
For example, fear does provide information content. "If my loved one does not get surgery soon, they may die!" A feeling of fear signals potential risk in the future. Unfortunately, fear is a blunt signaling device. Fear does not properly evaluate the significance of the risk. As such, fear may create bias because we may under- or overreact to the level of risk signaled by fear.
The essential point is to separate the good judgment from the unwanted bias. Use fear or other emotion to motivate quick evaluation but NOT to make the decision itself. To properly evaluate emotion, an 80/20 way to approach a significant health decision is to:
Inform yourself as suggested in priority 1&2 earlier.
Share your learnings with the decision team.
Clearly define your decision benefit criteria, risk criteria, and costs, such as:
Psychological pain tolerance of the patient (how long can the patient withstand the pain)
Aside from the pain impact, patient outcome risk scaled over time (short / medium / long time). That is, what are the probabilistic outcomes (positive or negative) and what is the likely timing of those outcomes.
Quality of the surgeon and medical team (Good or Great). Since bad surgeons will likely be filtered out as a viable alternative, this criteria should isolate the weighting of going from good to great.
Availability of Surgeon (short / medium / long)
Cost and insurance coverage for surgeon and related treatment costs.
There may be other criteria and costs… this list should be tailored to your situation.
Weight the criteria. This is good to do with other responsible family members, the patient (if able), and a situationally independent hospital administrator. As a best practice, the surgeons should be consulted as information input to the decision but likely should not directly influence the decision model or alternative scoring.
Apply the criteria to each surgeon and treatment alternative.
As we discussed in the resource section, there are apps like Definitive Choice to help with this decision-making process.
Once your criteria are clearly defined and weighted, the best surgery alternative will reveal itself as the surgeon alternatives are evaluated. The Pareto trade-off magic happens in the weighting. Decision science tools like Definitive Choice have the process to help patient decision teams make a fast, accurate, and confidence-inspiring decision. Attempting to weigh the criteria and alternatives without assistance is most challenging. As discussed in section 2, our own brains are not geared toward complex, multi-criteria, multi-alternative decision. On top of our natural decision challenges, the addition of the emotions we feel for our loved one causes even bigger decision challenges. Since the many 80/20 tradeoffs are handled in the app, the final decision recommendation is more likely to be Pareto-inspired and accurate!
4. Conclusion
Pareto developed the 80/20 science to implement Voltaire's aphorism to not let "Perfect be the enemy of good." In the decision sciences and choice architecture world, this helps us think about making decisions involving regular, life-improving trade-offs. While "running from the lion" was a helpful decision our ancestors made, today, we need to regularly make more complex trade-off decisions. A healthy debt repayment method and a healthy smoothie example were provided to demonstrate the Pareto Principle in action. This trade-off framework is helpful for all modern-day decisions. Next, is an easy-to-use app and group decision choice architecture resources to help you make the best decisions in a complex world.
5. Resources
Definitive Choice: For individual or small organization groups - This smartphone app provides a convenient way to enter and weigh your preference criteria, then, enter your potential decision alternatives and their costs. Behind the scenes, it uses decision science to apply your tailored preferences and preference weights to score each of your alternatives. Ultimately, it renders a rank-ordered report to help you understand which alternatives will give you the biggest bang for your buck. Using a decision support app will 1) save you time, 2) optimize your economic value achieved, and 3) increase your decision-making confidence!
Definitive Pro: For corporate and larger organizations - This is an enterprise-level, cloud-based group decision-making platform. Confidence is certainly important in corporate or other professional environments. Most major decisions are done in teams. Group dynamics play a critical role in driving confidence-enabled outcomes for those making the decisions and those responsible for implementing the decisions. Definitive Pro provides a well-structured and configurable choice architecture. This includes integrating and weighing key criteria, overlaying judgment, integrating objective business case and risk information, then providing a means to prioritize and optimize decision recommendations. There are virtually an endless number of uses, just like there are almost an endless number of important decisions. The most popular use cases include M&A, Supplier Risk Management, Technology and strategy portfolio management, and Capital planning.
6. Notes
[i] Editors, Voltaire, Wikipedia, Accessed 6/4/2023
[ii] Economists refer to the value we receive from our "what is important to me or us" criteria as utility. "Utility" is the core driver of demand and is the aggregation of preferences we have for a good or service. Our economy operates via the interaction between supply and demand. As such, understanding utility is at the core of successfully navigating the modern economy. Understanding our utility is surprisingly complex and challenging.
Hulett, Assessing value like Warren Buffett: Price is what you pay, value is what you get, The Curiosity Vine, 2022
[iii] In the cited article, discussed are the challenges of and approaches to achieving long-term health and minimizing chronic disease. The cited article provides a Pareto Principle consistent example for implementing healthy behaviors as a means to achieve a long and healthy life.
Hulett, Getting the Most Out of America's Sickcare System, The Curiosity Vine, 2023
[iv] Our hard-wired fight or flight decision-making processes have subtle and significant impact to our day-to-day decision-making. Good follow-up questions to understand the importance and impact of our subconscious decision-making routines are:
How many generations came before me? and
What is the probability that I am here today as a product of all my ancestors?
Adam Frank is an astrophysics professor at the University of Rochester. Dr. Frank estimates there have been 400 human generations between now and the beginning of humanity. While your ancestral tree branched off from the first human generation, we all have about 400 generations. Now let's do some quick math. In the case of generational math, probabilistic combinations are serially dependent. This means, for you to be alive today, every preceding generation had to live long enough to have children. If there was one break in the chain, you would not exist! The formula for the dependent serial combination is:
The chance of you being alive today = P^N
where:
P is the average probability of all generations living long enough to have children and
N is the number of generations.
So, very conservatively, let us say there is a 90% chance since the beginning of time that each of your ancestors lived long enough to have the next child in your generational line. Since there are 400 generations, the probability you or any of us are here today is an astoundingly low probability approaching 0 (.9^400 equals a super small number with 19 zeros to the right of the decimal point!)
That means you are exceedingly rare. Your existence is a probabilistic rounding error. No wonder your genetic decision-making code has been hard-wired for fast fight or flight decisions. It was the precious few people that escaped from the lion to have children! The vast majority of "lion snack peeps" did not live long enough to pass on their slower decision-making DNA.
Frank, Who Were Your Millionth-Great-Grandparents? National Public Radio, 2017
Hulett, Solving the Decision-making Crisis: Making the most of our free will, The Curiosity Vine, 2023
[v] Hulett, Great decision-making and how confidence changes the game, The Curiosity Vine, 2022
[vi] Editors, Vilfredo Pareto, Wikipedia, Accessed 6/3/2023
[vii] Editors, Why Most New Year's Resolutions Fail, Lead Read Today, The Ohio State University Fisher School of Business, 2023
Behavioral Economists approach non-compliance by suggesting commitment devices. These are automations, such as auto transfer to an investment account from your regular paycheck, that enforce compliance. I am a big fan of commitment devices, especially for personal finance. Nobel Laureate Richard Thaler's groundbreaking research helped pave the way for the widespread use of commitment devices.
Thaler, Sunstein, Nudge, The Final Edition, 2021
[viii] In the graphic at the beginning of this article, the marginal benefit would be the first derivative of the blue value line. The marginal cost would be the first derivative of the orange compliance line. So, one only needs to eyeball the bad-good-great segments. In the bad segment, it is clear the slope of the value curve is much greater than the slope of the compliance cost curve. This means moving toward good is economically beneficial. Also, in the great segment, it is easy to see that the slope of the value curve is much lower than the slope of the compliance cost curve. This means stopping at good is economically beneficial.
[ix] Mullainathan, Shafir, Scarcity: Why Having Too Little Means So Much, 2013
[x] Ramsey, The Total Money Makeover: A Proven Plan for Financial Fitness, 1994
[xi] Hulett, “Boil Your Own Frog” ... and other high-energy eating habits, The Curiosity Vine, 2021
[xii] Autor, Why Are There Still So Many Jobs? The History and Future of Workplace Automation, JOURNAL OF ECONOMIC PERSPECTIVES, VOL. 29, NO. 3, 2015