# 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.