Whatterz


The Pareto Principle – The 80/20 Rule to You and Me

by Simon. Average Reading Time: less than a minute.

The Pareto principle (also known as the 80/20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.

The original observation was in connection with income and wealth. Pareto noticed that 80% of Italy’s wealth 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.

The principle has become a common rule of thumb in business; e.g. 80% of your sales come from 20% of your clients.

The principle is also an illustration of a Power law relationship, which occurs often in natural phenomena such as brush-fires and earthquakes. Because it is holds true over a wide range of magnitudes, it produces outcomes completely different traditional prediction schemes. It has been claimed, for example, that it explains the frequent breakdowns of sophisticated financial instruments. This is also likely true of any complex system, including social ones, and increasingly social and community dynamics are seen as falling under this rule in numerous ways, from participation pyramids to abandonment rates.

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