The 80/20 Rule

-Vanshika Paharia

If I told you that all the efforts that you have been putting into achieving anything have been a lie, how would you feel? Not good for sure. But an Italian economist, statistician and engineer waltzed into our life and very easily said that 80% of everything we did was a waste. And somehow, his findings find place in every possible field. He has shown us that not all inputs give you outputs.

Vilfredo Pareto is known for his Pareto Efficiency and Pareto Distribution, a famous probability distribution with over 20 applications. But no one knew that one day, Pareto would realize that out of 100 pea pods, only 20% of them gave 80% of the total healthy peas. Basically, out of 100 pods, if total healthy peas were 300, 20 pods contributed about 240 healthy peas. Mr. Pareto found this to be so crazy that he opened Italy’s map and saw that only 20% of the land incorporated 80% of the population. An even crazier thing was that this was the case with most countries.

Stick Figure Economics - Concepts from Economics, illustrated for the rest  of us: Understanding the Pareto Principle (aka the 80/20 Rule)

This rule came to be the Pareto Principle, the 80-20 Rule, the law of the vital few or the principle of factor sparsity. This basically means than only 20% of something gives 80% output and thus, the converse is also true. This is wild because we have been putting way more efforts into everything than required. We can achieve more by working less. This goes against everything we have been taught about hard work and although there are exceptions, they are few. The applications of this rule aren’t just in daily life but in business, economics, philosophy, sports and in a lot many fields.

Pareto principle - Wikipedia
What Is the 80/20 Rule? The Pareto Principle Explained

Now, I will try to explain to you, as many concepts as possible pertaining to this rule. Along with its possible mathematical relation and significance. The topic is expansive and I will cover as much as possible.

History- Vilfredo Pareto has quite a lot of theories on income distribution. His studies made him realize that 80% of tax comes only from 20% of the population of a country and only 20% of the population generates about 80% income. Hence, his observations come mainly from population and wealth. Then, a management consultant Joseph Juran developed the concept in context of quality control and named it the “Pareto Principle”

Distribution of world GDP, 1989
Quintile of populationIncome
Richest 20%82.70%
Second 20%11.75%
Third 20%2.30%
Fourth 20%1.85%
Poorest 20%1.40%

Mathematical Significance- Pareto principle is not a law but an observation which holds true most times. The 80-20 Rule has also been said to be a simpler version of the Pareto probability distribution, a positively skewed and heavy tail probability distribution. Pareto distribution itself finds application in stock market as well as insurance.

Pareto versus normal distributions | Download Scientific Diagram
As we can see, the distribution is skewed to the left and has a heavy tail

So, as every probability distribution has parameters, pareto distribution has alpha (a) as one of the parameters. Now, if this a=1.16, then 80% of the effects will be from 20% causes. Pareto principle is a special case of this distribution. What’s fun is that, top 80% of these 80% effects come from top 20% of 20% of the causes. This implies a 64/4 ;aw and this continues. Here, within one principle, a few others are closely vested. Also, because pareto distribution is positively skewed, if a probability distribution chart was to be formed for pareto distribution, the first 20% of outcomes will show of about 80% probability.

Pareto principle is an illustration of “power law” relationship. A power law is a functional relationship between two quantities, where a relative change in one quantity results in a proportional relative change in the other quantity, independent of the initial size of those quantities: one quantity varies as a power of another.

Now, getting into detail of a pareto rule may be difficult for me to explain in such a short article. So, we shall immediately skip to its mind boggling applications.

Applications- Pareto rule finds applications in every possible field.

  1. Finance– Only about 20% of your portfolio will give you 80% of wealth. And this principle can help you eliminate useless stocks from your portfolio. This principle is called the principle of vital few because only a few will be vital to your results from a significant amount of useless inputs.
  2. Management– The history of management revolutionized due to the application of this principle. Time management is a huge part of the 80/20 rule as it clearly says only 20% of the time you spend on anything will give you 80% inputs. Manage your time carefully because chances are we are spending time on a lot of irrelevant side activities. Other than that, it helps us recognize the active employees of any organisation. Because, chances are that only 20% of the workforce is getting in 80% of billing. The same stands for customers and users.
  3. Economic– Pareto efficiency and pareto rule are tangentially related. According to pareto efficiency, for every best outcome, something will be worse off. Or, while trying to better something, you are bound to make something worse off. Of course, economy wise, pareto principle has changed the way a country looks at its taxes.
  4. Quality Control– When Mr. Juran built the concept, it was in terms of quality control. Because only 20% of your production batches will give 80% of proper, non defective products. Pareto principle is the basis of a Pareto chart, a key tool used for total quality control and Six Sigma techniques.
Pareto chart - Wikipedia

5. Everyday Life– All the social media accounts that you are following, only 20% of them give you absolute joy. The same is with your peer group. You will find it surprising that 20% of your friends contribute to 80% of the happiness you feel in their presence. This is psychologically proven because if that one friend sits out an outing, we feel less happy. This significantly differs from person to person but is true in its essence.

There are applications in health and social outcomes, engineering, computation and a lot more fields.

Disadvantages- Although a rule/principle, it is not a law. 80/20 holds most times, but not always. It can be 30/70 or even 40/60. But most times it is 80/20..

So, now that you are very much aware of this, you know how to practice efficiency. Next time when you seat for a meal, you will realize that only 20% of the plate gives you 80% of your nutrients. To know more, you should definitely read up on this further. Pareto was a brilliant man and this is an ode to the ones who developed his study further. The topic is vast and intricately interwoven with 20 other economic, financial and mathematical concepts. It’s a wrap for now but let us know in the comments how the rule applies to your life.

References-

https://en.wikipedia.org/wiki/Pareto_principle

https://www.sciencedirect.com/science/article/pii/0895717794900418

https://betterexplained.com/articles/understanding-the-pareto-principle-the-8020-rule/

Published by mscnm

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