Pareto principle - Alchetron, The Free Social Encyclopedia

The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who noted the 80/20 connection while at the University of Lausanne in 1896, as published in his first paper, "Cours d'économie politique". Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that about 20% of the peapods in his garden contained 80% of the peas.

It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients." Mathematically, the 80/20 rule is roughly followed by a power law distribution (also known as a Pareto distribution) for a particular set of parameters, and many natural phenomena have been shown empirically to exhibit such a distribution.

The Pareto principle is only tangentially related to Pareto efficiency. Pareto developed both concepts in the context of the distribution of income and wealth among the population.

In economics

The original observation was in connection with population and wealth. Pareto noticed that 80% of Italy's land was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.

A chart that gave the inequality a very visible and comprehensible form, the so-called 'champagne glass' effect, was contained in the 1992 United Nations Development Program Report, which showed that distribution of global income is very uneven, with the richest 20% of the world's population controlling 82.7% of the world's income.

In science

The more predictions a theory makes, the greater the chance is of some of them being cheaply testable. Modifications of existing theories make many fewer new unique predictions, increasing the risk that the few predictions remaining will be very expensive to test.

In business

The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:

80% of problems can be attributed to 20% of causes.

80% of a company's profits come from 20% of its customers

80% of a company's complaints come from 20% of its customers

80% of a company's profits come from 20% of the time its staff spent

80% of a company's revenue comes from 20% of its products

80% of a company's sales are made by 20% of its sales staff

Therefore, many businesses have an easy access to dramatic improvements in profitability by focusing on the most effective areas and eliminating, ignoring, automating, delegating or retraining the rest, as appropriate.

In software

In computer science and engineering control theory, such as for electromechanical energy converters, the Pareto principle can be applied to optimization efforts.

For example, Microsoft noted that by fixing the top 20% of the most-reported bugs, 80% of the related errors and crashes in a given system would be eliminated.

In load testing, it is common practice to estimate that 80% of the traffic occurs during 20% of the time period.

In software engineering, Lowell Arthur expressed a corollary principle: "20 percent of the code has 80 percent of the errors. Find them, fix them!"

Software frameworks have often been observed to make 80% of use cases easier to implement and 20% of use cases much more difficult to implement.

In the mobile game industry, it has been noted that for free-to-play games, over 50% of the game's profit comes from 0.5% of the players.

In sports

It is said that about 20% of sportsmen participate in 80% of big competitions and out of them, 20% win 80% of the awards. This could also be applied to teams in many popular games.

The Pareto principle has also been applied to training, where roughly 20% of the exercises and habits have 80% of the impact and the trainee should not focus so much on a varied training. This does not necessarily mean eating heartily or going to the gym are not important, just that they are not as significant as the key activities.

The law of the few can be also seen in betting, where it is said that with 20% effort you can match the accuracy of 80% of the bettors.

Occupational health and safety

Occupational health and safety professionals use the Pareto principle to underline the importance of hazard prioritization. Assuming 20% of the hazards account for 80% of the injuries, and by categorizing hazards, safety professionals can target those 20% of the hazards that cause 80% of the injuries or accidents. Alternatively, if hazards are addressed in random order, a safety professional is more likely to fix one of the 80% of hazards that account only for some fraction of the remaining 20% of injuries.

Aside from ensuring efficient accident prevention practices, the Pareto principle also ensures hazards are addressed in an economical order as the technique ensures the resources used are best used to prevent the most accidents.

Other applications

In the systems science discipline, Epstein and Axtell created an agent-based simulation model called SugarScape, from a decentralized modeling approach, based on individual behavior rules defined for each agent in the economy. Wealth distribution and Pareto's 80/20 principle became emergent in their results, which suggests the principle is a collective consequence of these individual rules.

The Pareto principle has many applications in quality control. It is the basis for the Pareto chart, one of the key tools used in total quality control and Six Sigma techniques. The Pareto principle serves as a baseline for ABC-analysis and XYZ-analysis, widely used in logistics and procurement for the purpose of optimizing stock of goods, as well as costs of keeping and replenishing that stock.

The Pareto principle was also mentioned in the book 24/8 - The Secret for being Mega-Effective by Achieving More in Less Time by Amit Offir. Offir claims that if you want to function as a one-stop shop, focus on the 20% of a project that is important and that you save a lot of time and energy.

In health care in the United States, 20% of patients have been found to use 80% of health care resources.

The Dunedin Study has found 80% of crimes are committed by 20% of criminals. This statistic is used to support both stop-and-frisk policies and broken windows policing, as catching those criminals committing minor crimes will likely net many criminals wanted for (or who would normally commit) larger ones.

Gini coefficient and Hoover index

Using the "A : B" notation (for example, 0.8:0.2) and with A + B = 1, inequality measures like the Gini index (G) and the Hoover index (H) can be computed. In this case both are the same.

H = G = | 2 A − 1 | = | 1 − 2 B | A : B = ( 1 + H 2 ) : ( 1 − H 2 )

Theil index

The Theil index is an entropy measure used to quantify inequalities. The measure is 0 for 50:50 distributions and reaches 1 at a Pareto distribution of 82:18. Higher inequalities yield Theil indices above 1.