Definitions Deconstructed
Pareto Principle
S. G. Lacey
Definition:
A concept which specifies that 80% of consequences come from 20% of causes, asserting an unequal relationship between inputs and outputs. [REF]
Deconstruction:
This theorem has numerous descriptive monikers. Principle. Rule. Distribution. Ratio. These various terms are always proceeded by one man’s last name. Pareto. Who is this individual, and how did they discover the now-famous efficiency construct?
Not surprisingly, the namesake, Vilfredo Pareto, was an economist. Along with holding titles as a civil engineer and sociologist. This extensive educational background isn’t surprising, considering the nuanced, nerdy nature of his numerical notion.
As with many novel revelations, the idea came from experiential observations in this Italian polymath’s own life. Namely, the drastic imbalance of land ownership in the country he called home.
Mr. Pareto, born almost exactly in the middle of the 19th century, formalized his foundational socioeconomic theorem in 1906. Finding difficulty buying a house, he researched the distribution of wealth within his local municipality, and determined that 20% of the residents controlled 80% of the real estate. Further analysis throughout Italy, and around the globe, yielded a similar inequitable breakdown.
This unique understanding led Pareto to coin the term “elite”, which is now synonymous with the highest echelon of societal status. He’s also credited with founding the field of microeconomics, that explores how individuals and small businesses make decisions regarding allocation of scarce resources.
Modesty is a common trait amongst economists. As such, it wasn’t until well after Vilfredo’s passing that another in this field of research, Joseph Juran, codified the Pareto Principle, in 1941, while working as a management consultant. Sadly, the innovative founder’s name has even been dropped in recent times, with this discovered distribution simply referred to as the 80/20 Rule.
The suggestion that “the minority owns the majority” reverberates through many aspects of modern life. However, the Pareto Principle is not a fixed mathematical law, but merely a pragmatic thesis which applies in some realms. As it turns out, the concept is relevant to a surprising amount of disparate fields and situations.
Despite being an observational inference, the Pareto Principle is founded upon a very concrete scientific equation. The Power Law, which plots probability density functions that offer up a reduced central area under the curve, and long outlier tails. For mathematics wonks, the prescribed 80% to 20% distribution equates to a log 4 scale shape value of 1.16.
In layman’s terms, each unit of effort is not linearly associated with an equivalent level of results. The graph below shows a very basic breakdown of this Power Law function, inverted in this case, with the specific Pareto Point clearly labelled. [REF]
The curvature of the green path can be adjusted; moving closer to the straight red line equates to greater correlation between input and output, while increasing the kink represents a more tail-skewed distribution. For most projects, the biggest hurdle to progress is simply getting started, with final completion of task often dragging on much longer than planned.
There are numerous offshoots of the alliterative Pareto Principle, identified by the names of various other practitioners who conceived them.
The Bradford Distribution, conceived in 1934, during the same era of economic exploration, which espoused that providing references in scientific journals offers diminished returns, a revelation that all sleep-deprived college students know well.
Zipf’s Law, attributed to the uniquely named American linguist, who suggested word usage in the English language is quite skewed, with common terms encompassing the vast majority of normal conversation, in both written and spoken forms.
The Matthew Effect of accumulated advantage, where the rich get richer, and the poor get poorer. Global wealth inequality metrics like the Gini Coefficient attempt to quantify this disparity, which is clearly evident both within specific developed countries like the United States, and across nations with widely varying levels of economic resources.
And, most intriguing, Sturgeon’s Law, coined by a polarizing 1950’s science fiction author, which simply states “90% of everything is crap.” A quick stroll through the endless isles at the local big-box department store, or fighting feverishly to close the multitude of pop-up adds during an online computing session, definitely confirms this sentiment.
There are numerous machinations of the Pareto Principle. And several quotes which capture the essence of this rule. “Inequitable distribution.” “The vital few.” “Diminishing marginal returns.” “Principle of factor sparsity.” “Quantity over quality.”
Though known as the 80/20 Rule, in reality, the sum of the two values doesn’t need to equal 100, depending on the disparity in the distribution trying to be described. For example, 10% of drinkers account for 50% of all alcohol sold. Just 1% of productive internet users create nearly all web content, while another 90% of people simply lurk in the background as passive observers. Per research studies, only the top 20% of gamblers account for 92% of all wagering activity.
While not universal, there are countless areas where these general concepts apply, from costing to consumers, management to manufacturing, profits to policy, and technology to timeliness. Below are a few of the most relevant examples of the Pareto Principle, which have been born out through detailed review of analytical data.
Size breakdown of human settlements, with just a few high populous cities, compared to countless small villages.
TV news coverage tilts heavily towards a small number of events, a situation which is painfully obvious in this current political cycle, and amplified by shared viral content on social media.
20% of patients incur 80% of all healthcare expenses, primarily due to end-of-life chronic conditions. As the famous quote goes, the squeaky wheel gets the grease. And, in modern parlance, the expensive car owner gets the fancy maintenance package.
Many elements of computer programming, including excess time required to write key sections of code, the cause of major software glitches due to persistent bugs, and search engine traffic based on common key words.
Extreme weather events, like tornados, brush fires, earthquakes, and specifically outlier rainstorm precipitation amounts, with subsequent flooding, activities which are becoming increasingly violent and catastrophic due to climate change.
In the business realm, 80% of sales and profits are achieved through 20% of workers’ efforts, product offerings, and retail clients. On the consumer side, 20% of cost outlays yield 80% of the perceived value.
Criminal activity, customer complaints, corporate absenteeism, and general sources of stress or grief, all exhibit a skewed distribution, with a few bad apples in society causing the majority of issues for the general public as a whole.
Many facets of transportation, including citywide road usage, drivers triggering automobile accidents, home carpet wear, international shipping logistics, and airplane travel hubs.
Continuing Vilfredo’s original treatise, shareholder stock ownership, source of investment returns, and global wealth breakdown, all follow the Power Law ratio which he observed throughout his Italian homeland, that has now gone global, and digital.
80% of the population finds only 20% of it attractive. The irony of such polling is both comedic and sad at the same time. Maybe that’s how we ended up with so many online dating apps.
Countless observed natural world phenomenon: dominant species, farming yields, oil reserves, sand particles, birdwatching observations, and meteorite craters.
The Pareto Principle can also be applied as an inverse, with 20% of inputs accounting for 80% of the outcome. The list of everyday cases where this ratio applies is broad: clothing wardrobe, doctoral malpractice, cellphone apps, unhealthy foods, marriage divorcees, children’s education, and television programing.
Effective entrepreneurial leaders can use this Power Law distribution to focus and delegate, utilizing economic cost benefit analysis to dictate key corporate actions. Some of the teachings of the Pareto Principle come right out of business start-up textbooks.
Take risks, as life outcomes are non-linear and imbalanced. Pick high value tasks, while removing key roadblocks. Move with speed, doing more with less. Do the work to identify opportunities, then pounce with vigor. Ruthlessly eliminate tasks that are unproductive to the goal. Specialization is valuable, if the correct fields are selected. Build autonomy, and learn from the failures of others. Focus, then leverage capital on productive activities.
The Pareto Principle can be applied as a guiding light for decision making in many facets of life. This concept is invaluable for identify opportunities that can be exploited, or problems which need to be fixed.
Focus on your best ideas, embrace your most effective habits, optimize your work hours, to facilitate success, happiness, and productivity. But don’t forget that 4/5ths of the way there doesn’t represent full completion of task. Not a bad north star for navigating the complexities of the modern world.
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