1. Introduction
- Concept Definition: The 80-20 percent rule or Pareto principle states that roughly 80% of consequences come from 20% of causes for many outcomes.
- Concept Founder: Vilfredo Pareto first showed in his first work, Cours d'économie politique, in 1896 that approximately 80% of the land in Italy was owned by 20% of the population.
- Concept Benefit: Understand the relation between input and output, cause and result. Knowing where to put the focus when trying to maximize the outcome.
2. How To Demonstrate It?
- The 20-80 rule effect was found by the Italian economist Vilfredo Pareto in 1896.
- He observed that 80% of the land in Italy was owned by around 20% of the people.
- He also witnessed the same ratio with plants in his garden.
- Around 20% of the fruits beared 80% fruit.
3. Where Can It Be Found?
- 20% of the world's income is owned by 80% of the people.
- 20% of criminals commit 80% of crimes.
- 20% of drivers cause 80% of all traffic accidents.
- 20% of a company's products represent 80% of sales.
- 20% of employees are responsible for 80% of the results.
- 20% of website generate 80% of visitor traffics.
- 20% of a plant contains 80% of the fruit.
- 20% of players result in 80% of points scored.
- 80% of the pollution originates from 20% of all factories.
- 80% of the total insurance cost is paid in the last 20%.
- 80% of the working time is on productivity, 20% are on administration.
4. Why Does It Exist?
- Related to Normal Distribution: One of the most common distributions in nature is the normal distribution. A normal distribution explains the average relationship between two independent variables, input (x-axis) and output (y-axis). Normal distributions are important in statistics and often used in the natural and social sciences to represent real-valued random variables whose distributions are unknown. In a normal distribution, roughly 20% of the x values create approximately 80% of the y values, as seen in the chart. This is why the ratio for the Pareto effect is about 20:80. This is to be understood as a rule of thumb, the numbers could sometimes also be 70-30 or 60-40. As long as the two are independent, the 20/80 rule will apply. For example, the circle scope depends on the circle radios shown by the formula U = 2 · r · π. The 20/80 rule does not apply in this case.
5. How Do I Benefit From It?
- Do: Once understood the Pareto effect, a decision maker should leverage the most from the 20% input. For example, Jeff Bezos only puts critical meetings in the morning when his brain is the clearest and his productivity is the highest. Work smart instead of work hard, leverage the most effective 20% to produce the 80% result.
- Don’t: Understand that in a lot of situations, the input and output relation is non-linear. Some input causes more output and vice versa. Do not always expect linear relation as some causations are rather exponential rather than linear.