As it was then venerable Vilfredo Pareto who back in 1906 observed that the majority of the land (80 percent) in Italy was owned by the minority or roughly 20% of the population. The Basis which he used to develop this principle was that he observed a mere 20% of the pea pods [plants] in his garden contained the majority say 80% of the peas.
From Pareto’s pea pods this has grown into a common axiom that “80% of your sales come from 20% of your clients”. As from a math-magical perspective, we can say where something is shared among a “sufficiently large set of participants”, there must be a number we will call “k” which sits between 50 and 100 such that we can take “k% by (100 − k)% of the participants”. Here the number “k” is likely to vary from 50 (in the case of equal distribution, i.e. 100% of the population have equal shares) to nearly 100 (where a small number of participants end up accounting for the majority of all of the resource). From this we see there is nothing overly special or magical about the number 80% mathematically as in a systems perspective, yet many “real systems” have “k” somewhere around this region of intermediate imbalance in distribution and thus the rule of thumb.
So why you ask are we visiting this turn of the century renaissance economist today? Well blame it on Forbes as they ran a story which got me thinking titled “The 147 Companies That control Everything” as this yarn is about three systems theorists at the Swiss Federal Institute of Technology located in Zurich which have taken a database listing and amazing 37 million companies along with investors worldwide and they modeled all 43,060 transnational corporations and share ownerships which link each of them.
The results of this study were referenced (by Forbes) from the New Scientist and were stated as:
“When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions.”
As here we see control is no longer 1:4 (or 20/80) as it is now 1:40 or ten times the ratio! While the New Scientist didn’t release the entire list of the 147 companies the top 20 which was shared contain all holding and investment companies. Wow, things that make you go hmmmm for sure as I’m not battling capitalism here, however pointing out a flaw in its application. As in the world of genetics, our friend Darwin called out diversity drives success in survival of the fittest.
So with a 1:40 ratio as you can guess diversity is gone and second will bet you that there further kurtosis in the 1% numbers meaning within this 1% there is an even “higher” distribution meaning 1:60 or 1:80 ratio exist “inside” those numbers. Ok, your eyes are glazing over so what is the point here your asking?
Simple, when too few own to much, their patterns tend to match as do you remember the melt down of 2008? Yes Virginia too many of these same folks made the “same” move and when one fell they all fell like a house of cards. So this tells me we are no better [risk] wise then before as the markets lack diversity, and the lower the diversity the greater the chance to be visited by a per-verbal Black Swan event as in 2008.
So please remain seated and buckle those seat belts tightly as we could be looking at some rough air in our future flight plans…