Understanding the Pareto Principle

The Pareto principle is also known as the 80/20 rule. It states that for many phenomena, 80% of the consequences stem from 20% of the causes. The principle was suggested by Joseph Juran. He was a management specialist in the earlier part of the 1900’s. The name Pareto comes from the Italian economist Vilfredo Pareto. He observed in the late 1800’s that 80% of the income in Italy was received by 20% of the population. The assumption to make is that most of the results of any situation are determined by a small number of causes. There a mathematical variations to these percentages depending on the application. In this study, we will also look at a related idea that might be called the 90/10 factor.

Examples of the 80/20 law would be that in the work world, 20% of your efforts produce 80% of the results. Some others might be that 20% of your activities will account for 80% of your successes or that of all your friends and acquaintances, 20% of them will provide 80% of nurturing support and satisfaction. It has even been suggested to explain the distribution of matter in the universe. Such as 80% of all matter is contained in 20% of the universe. This rule can be applied in many ways. Take for instance at AC, where it is likely that 20% of the authors will eventually account for 80% of the most popular material. It is also possible that 20% of the writers will garner 80% of the payouts. This rule has been applied to areas such as job satisfaction, losing weight, investing, and even horse racing.

The Pareto principle applies to just about any type of business situation. The exceptions are business structure and salary/ wages. The distribution of salary is more like 90/10 in some cases. Possibly 10% of the highest ranking executives earn about 90% of the salary especially in larger corporations where the the highest earners might make over 50 or 100 million dollars. The reverse is that 80-90% of the employees do the work that provide the mountainous salaries of the few at the top. Take the major league teams in sports. The top handful of players will usually earn the majority of the income paid out by management. Or, in Hollywood the top few name actors will make the vast bulk of the earnings. Expand this idea to a MLM scheme and 5-10% of the people at the top will earn 90% of the income. It will take 90% of the number of participants to support the top 10%. This also applies to trading in securities. It is well documented that 10% of all players will be consistently successful. Usually at the expense of the other 90%. Pareto’s law can be implemented in explaining why the rich get richer and the poor get poorer. In that the more that can be invested, the more can be earned. An example would be a rich man earning 20% on his million dollar investment. Contrast this to a poorer person earning 20% on a $20,000 investment. The rich man earns 50 times as much with the same rate of return. Thus the few owners of larger accounts will continue to far outgrow the many with smaller accounts.

This idea can be used in practical situations. If you own a business, expect that 10-20% of your customers will provide 80-90% of your sales. So you would benefit by catering to those clients. For project managers, it is accepted that the first 10% and the last 10% of effort will account for 80% of the time consumed for any given undertaking. So it would be wise to focus your best efforts at those times. If you play poker, for example, expect that 80-90% of your winnings will come from 10-20% of your hands. The professional player is aware of this phenomenon and uses it to his advantage. The same would be true with investing or trading. It is quite likely that the smaller percentage of winning trades will provide you with the majority of gains. Pareto’s law can be applied toward almost any endeavor. From business to doing housework, 80% of the results will usually come from 20% of focused effort. For businesses, there is software available that can be added into an Excel spreadsheet. Numerous statistical and graphical studies can be made with this interface based on the 20/80 principle. Charting software for more personal uses is also available.

Paying attention to this rule can help you concentrate on what is important. Dieters might find that 80% of their weight gains come from 20% of the foods they consume. In contrast, they might find that 20% of their exercise routine produces 80% of the benefits. Someone engaged in research might discover that 80% of valuable information comes from 20% of resources. And that 80% of the time spent in research will almost be wasted. Understanding this law and knowing how to apply it to everyday living can save time and effort. The Pareto rule is almost 100 years old and has been demonstrated to apply to the modern world of today. You can use this law by keeping in mind that 20% of your efforts will likely generate 80% of your results.

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