Pareto principle

The so-called 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 phenomena 80% of consequences stem from 20% of the causes. The idea has rule-of-thumb application in many places, but it is commonly misused.

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The principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of property in Italy was owned by 20% of the Italian population. (Since J. M. Juran adopted the idea, it might better be called "Juran's assumption".) The assumption is that most of the results in any situation are determined by a small number of causes. This idea is often applied to data such as sales figures: "20% of clients are responsible for 80% of sales volume." Such a statement is testable, is likely to be approximately correct, and may be helpful in decision making.

Related Topics:
Joseph M. Juran - Vilfredo Pareto

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The principle is often misconstrued because of the coincidence that 80 + 20 = 100: it could just as well read that 80% of the consequences stem from 10% of the causes. Many people would reject such an "80-10" rule, but it is mathematically meaningful nevertheless.

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The principle can be viewed as recursive, and may be applied not only to the top 20% of causes; thus there would be a "64-4" rule (64% of the consequences stem from 4% of the causes), and a "51.2-0.8" rule, and so on.

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Certain common applications of the principle misunderstand the original intent and are not, by themselves, credible. For instance: "20% of individuals in an organization perform 80% of the work." Or: "20% of our advertising creates 80% of our increased sales."

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This is a special case of the wider phenomenon of Pareto distributions.

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The Pareto principle is unrelated to Pareto efficiency, which really was introduced by Vilfredo Pareto.

Related Topics:
Pareto efficiency - Vilfredo Pareto

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