4 mathematical principles that every entrepreneur should use to make smart decisions

by Nabil Alouani –Entrepreneurs Handbook

Quick Example

Suppose you have an investment opportunity with an 80% chance of success (probability of winning), and they promise you a 20% profit (profit). However, if the investment fails, you will lose 10% of your money (deficit).

In this case, the Kelly criterion (K%) suggests that you invest 70% of your money. I've chosen these ridiculous numbers to show you that, even with ultra-staggering probabilities, the math advises against going all-out.

In more realistic situations, the formula returns a number that rarely exceeds 26%. By the way, these results do not only apply to monetary investments. You can also use the Kelly Criterion to manage your time, your sales, and your content.

In all cases, never bet 100% of your resources on the same bet.

The Pareto Distribution

Vilfredo Pareto was an Italian engineer interested in philosophy and economics. One fateful day in the late 1880s, Pareto decided to study how wealth was distributed in Italy.

He quickly discovered that 80% of Italian wealth belonged to 20% of the population. Decades later, another smart guy named Joseph Juran realized that Pareto's finding applied to other distributions like productivity, fundraising, and even the population of big cities.

This is how Pareto's first observation was generalized into the following principle

In business, the Pareto distribution means that 80% of your income will come from 20% of your work. If you want to optimize your time and energy, you need to identify your 20% (which can be products, tasks, or customers) and pay more attention to them.

This was the first reason I mentioned the Pareto Principle.

The second reason has to do with an analogous observation that can be a game changer for many entrepreneurs. Is called…

Minority rule

When I worked at Charles De Gaulle airport in Paris, I had a Muslim colleague who I hung out with a lot. Once, we decided to escape from the company canteen and go to a nearby shopping center to eat something tasty.

Muslims only eat Halal meat and so I had sushi in mind while looking for restaurants. But my friend stopped in front of a French franchise specializing in roast chicken.

"The food is great here," he said. "It is also 100% Halal."

I found this unlikely, since most Halal restaurants had Arabic or Asian names. Why was this purely French restaurant, supposedly of Christian origin, serving Halal food?

If you analyze the situation from a commercial point of view, the answer is very clear. Those who don't eat Halal don't mind eating Halal. But Halal eaters would never eat non-Halal food.

So a group of, say, 12 people including one individual is a Halal eater is almost guaranteed to dine at a sushi restaurant rather than a non-Halal chicken franchise. That's minority rule in a nutshell.

Here is how Nassim Nicholas Taleb formulated it:

Smart entrepreneurs preempt minority rule by catering to the preferences of inflexible minorities. They know that the flexible majority will simply follow them. Thus, they expand their clientele and maximize their profits.

Here are four quick examples that span different industries:

Recap and a quick anecdote

Math empowers logical reasoning, and logical reasoning empowers smart decisions. In the game of business, the smartest decision makers win.

Give yourself a tactical advantage by remembering these four principles:

I leave you with a precious memory of me.

My math teacher in high school was the kind of old-age genius you see in comics. He had a long white beard, oversized glasses perched on his pointy nose, and a mad-scientist laugh.

"It's all math," he once told me. «But mathematics is not everything… MUHAHA!».

Never forget that you have the power to be the exception to any equation.