Pareto Principle

In 1906, an Italian economist, Vilfredo Pareto was studying the unequal distribution of income in Italy, and observed that 20 percent of the people owned 80 percent of the wealth. He then created a mathematical formula to describe this phenomenon. In the late 1940s, Dr. Joseph Juran, a quality management pioneer, applied this 80/20 rule in his field, and called it the Pareto Principle.

Since then, the Pareto Principle has been shown to exist in many different areas, and have been applied to many different contexts.

The Pareto Principle is an observation (not a rule) that things in life are often not evenly distributed. 80/20 is just a rough guide of the distribution. For example, 20% of the inputs creates 80% of the result, or 80% of the effects come from 20% of the causes.

There are 2 most common misconceptions in the numbers 80/20. Firstly, the percentage 80 and 20 are not a fixed, given percentage, but more of a rough estimate. Secondly, both percentages might not necessarily add up to 100. For example, 20% of workers might be doing 80% of the work, but it might also be 20% of the workers doing 100% of the work. The 80/20 ratio is just to highlight the principle of the vital few; that a minority contributes or attributes to a majority.

Here are some examples where the Pareto Principle can be observed:

-          91.8% of the world’s population holds 17.7% of the world’s total wealth (according to 2012 statistics)

-          Criminology studies have found that 80% of crimes are committed by 20% of criminals

-          80% of sales are found to come from 20% of customers

Using this observation, we can be more efficient and effective in our daily life. Again I would like to emphasize that this is not a law of nature, but merely an observation based on recurring patterns. The numbers 80 and 20 are also not a given but an estimation. 80% is used to represent the major portion and 20% the minor portion.

-           Relationships: We spend roughly 80% of our time with 20% of our friends. Also 80% of our enjoyment and happiness hinges on 20% of the people we know (family or close friends). Knowing this might prevent us from neglecting the people closest to us just because we made new friends. Also it is impossible to maintain huge numbers of relationships, and we should not focus on quantity but quality.

-          Possessions: We each possess many material things (assuming we are from a developed country). However the things that is essential to us only accounts for about 20% of all our possessions. The rest are just clutter and take up space. This can also be applied when we pack our luggage for travelling. We generally tend to over-pack and end up only using a small portion of the things we bring.

-          Time management: A small number of things we do can help us achieve a large portion of our goals. By estimating the “value” or necessity of each item in our to-do-list, we can prioritize the tasks that contribute most to making the day productive. This helps us better organize our time, and allowing us to better achieve our goals.

-          Learning: Learning something new takes a lot of time and effort, especially the very first few steps. However, the Pareto Principle should help keep us motivated to overcome the initial difficulties at the beginning (the difficulties that causes us to lose heart and give up). In order to learn something new, 80% of mastery can be achieved in 20% of the time required. For example to learn enough of a new language to have a conversation (80%) would take about 20% of the effort/time while the remaining 80% effort/time will gain you the other 20% that makes you an expert and achieving full mastery.

-          Business: 80% of profits generally come from 20% of all sources. By finding out where the main source of revenue comes from, businesses can concentrate their attention on these areas (for example advertising to a specific audience) and not waste resources by adopting a broad-based strategy.

There are many other areas where, by applying the 80/20 observation, we can better figure out how to be more effective or efficient. This is not to say that the other 80% is not important. It is merely a tool to better prioritize what is most necessary, and to get that done first.

For example an artist takes 20% of the time to draw 80% of the picture (which would be lacking in details), but it is upon completion of the whole picture together with all the minute details that takes up most of the time that makes a masterpiece. The artist worked on the rough picture and outline first because it is of a higher priority, and with that done, the details can be added.

Similarly, our goals are not achieved with 80% of the results, but it is a good beginning along the route to success.