Satisficing And The Pareto Principle
Posted on October 26, 2022
by Don Shaughnessy
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On Sunday, while chatting with our younger daughter I mentioned satisficing as an interesting idea. I sent her an Investopedia article about it. Satisficing. She replied that she enjoyed the article, and while she had heard of the word before, she had underestimated its usefulness.
She also noted the similarity to the Minimum Viable Product design technique. MVP
That got me thinking a little
I think there may be a connection to the Pareto principle. Assuming that, on average, 20% of the input generates 80% of the outcome, would it be possible to discover the 20% and save most of the cost to get 80%?
Even if I can’t tell with precision what the 20% is and without knowing what the 80% part must include and could ignore, I would expect to get 80% for around 40% of the input cost. As more data came available future iterations would likely improve that. That idea is the foundation of Minimum Viable Product ideas. MVP is essentially a beta test and it must include enough of the features to prove the idea.
Designed once perfectly is impossible with every product and service.
How the approach works
I think in costly and complex situations trying to understand how the inputs connect to minimum necessary outcomes is sound decision-making practice. Once you get good at it, you recognize Pareto as a power law and notice the distribution of the remaining problem will be 80-20 as well. Suppose you could have 64% for 4% of the effort. or better yet 51.8% for 0.8% of the trouble.
This is an older article on the Pareto point. https://wp.me/p2GldA-8ac
. It is too theoretical to have assured practical value.
Nonetheless, the idea of how you measure value created and how your possible inputs will deliver those values is a worthy place to start – even if Pareto is entirely fiction. The trick will be to understand the minimum viable product in terms not only of what values must be in but also of which aspects can (should?) be left out.
It is a mistake to make a program too general.
Perhaps you need more than one program to solve exceptions.
In accounting, the rule for designing accounting systems is “It must handle routine transactions routinely, and non-routine transactions not at all.” Divert the non-routine to a specialized space. The non-routine situations are rare, and allowing them to enter the routine system is quite likely where the other 80% of the inputs go. Some of that cost is finding them again after the data becomes corrupted. Most computer programs have traps to isolate errors and demand you change your input. Date format is one that often happens. Accounting systems have traps that transfer the task to people who know what the exceptional transaction means.
I have no idea how anyone could implement this for program planning in the civil service, but given that the payback is gigantic, it seems worth some thought.
The bits to take away
Products and processes that are too ambitious are extremely costly and error-prone.
If there are just a few exceptional circumstances and many normal transactions, isolate the exceptions. You could deal with those with a pencil.
If you pay careful attention, you can isolate what must happen and what the minimum resource set to satisfy those may be.
No perfect system or product is possible in the beginning because we know too little. All good products and services evolve.
Why spend 100% to get an imperfect overambitious system that will require further investment to work. Often work just marginally.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning and business matters. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
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Category: Insight to Business, Learning, PlanningTags: decisions, Don Shaughnessy, government spending, learning, meaning, Pareto, problem solving, satisficing, strategy, tactics