The Pareto Law: Characteristics and Examples of the 80/20 Principle

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Today, a lot of people know about the Pareto law or the 80/20 principle. The spread of information was due to the widespread description of the importance of the principle by many startup sites and social networks, the practical application of theory in business and other areas to increase efficiency. Now, not only students of economic and sociological specialties who studied the model at lectures and seminars, were tasked to write an essay on the Pareto curve or optimum, have an idea about the law and can use it.

At the same time, the increased interest from various resources leads to a “blurring” of the boundaries of the concept, and, at times, endowing and confirming the Pareto principle with not entirely accurate characteristics and examples. This can lead to a misunderstanding of the 80/20 law as just another nonsensical economic model. To show that this is not the case, we present this material, in which you will find criteria, methods and examples of this theory.

 

Wilfredo Pareto

Vilfredo Pareto (July 15, 1848 – August 19, 1923) was an Italian engineer, sociologist, economist, political scientist and philosopher. Born in Paris, in the family of a nobleman, an engineer by profession, who, due to political convictions, was forced to immigrate from Liguria (Italy). Mother is French.

In 1858 the family returned to Italy, where Vilfredo Pareto was educated. Studied at the Polytechnic University of Turin. In 1869 he defended his doctoral thesis in the field of mechanical engineering on the topic "Fundamental principles of equilibrium in solids." His future interest in equilibrium in sociology and economics can already be seen in this work.

After completing his studies, he worked as a civil engineer, first as a civil servant for an Italian railway company and then in private industry. Later he became the manager of the San Giovanni Valdarno metallurgical plant, which is part of the Iron Works group, and after a while the general manager of the entire Italian Iron Works.

Until the age of 40, Vilfredo Pareto had little interest in science, in particular its theoretical side. From 1886, he began teaching economics and management at the University of Florence, declaring himself as an ardent opponent of government intervention in the free market. From 1893 until the end of his life he worked at the University of Lausanne.

In 1906, he first outlined the 80/20 principle, which later received his name. In addition, along with Gaetano Mosca, he developed the theory of elites, widely known in political science and sociology. The underlying concept is the circulation of elites. Vilfredo Pareto called political history "the graveyard of aristocrats", meaning that power is always in the hands of the elite, not the majority. When one elite declines, a new one emerges from among the non-elite. This is how the cycle happens. Read more about the theory of elites on Wikipedia (here).

Concluding a brief bibliographical note, we note that Vilfredo Pareto was ahead of his time to some extent. Most of his writings on economics resemble modern writings more than studies of the early 20th century. Biographers who studied the creative heritage speak of complex calculations, graphs, diagrams, statistics collected from all over the world, which the author carried out and placed on the pages of his works. Not surprisingly, some of his findings are still relevant today.

 

Pareto theory

Not many people know that the Pareto principle was not introduced into scientific circulation by Vilfredo Pareto himself. He was the first to discover the pattern, believing that 80% of all wealth in Italy belongs to 20% of the people. He then conducted surveys in many other countries and, to his surprise, found that there was a similar distribution.

There is also a story that before making a global calculation, Pareto, working in the garden, noticed that 80% of the peas are in 20% of the pea pods. It is difficult to say whether this is true or not, but be that as it may, the fact interested him and in the process of further development and comparison of data, the economist came to the conclusion that a similar trend in the distribution of wealth persists in different historical epochs, regardless of the political system. Having collected confirmations, the scientist did not offer a theoretical basis for his discovery, and for some time they forgot about him.

The Pareto Law: Characteristics and Examples of the 80/20 Principle

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In 1941, the American business consultant in the field of management J. Juran stumbled upon the distribution rule that interested him in Pareto's work. Comparing the data with his practice, he was convinced of the effectiveness of the principle and named it after the Italian scientist. The spread of the name "20/80" was due to the book by R. Koch "The 20/80 Principle: The Secrets to Getting More Results with Less Effort", which was first published in 1997 and later translated into 34 languages.

Let's move on to the theoretical essence of the Pareto principle: a small share of the reasons, invested funds or efforts, is responsible for a large share of the results, products obtained or rewards earned. In a more familiar sense for us, from the suggestion of the authors of Wikipedia, it sounds like this: “20% of efforts give 80% of the result, and the remaining 80% of efforts give only 20% of the result.” From this definition follows:

  • There are few significant factors, and there are many trivial factors – only single actions lead to important results;
  • Most of the efforts do not give the desired results;
  • What we see is not always true – there are always hidden factors;
  • What we expect to get as a result, as a rule, differs from what we get (latent forces are always at work);
  • It's usually too difficult and tedious to figure out what's going on, and often it's not necessary – all you need to do is know if your idea works or not, and change it so that it works, and then maintain the situation until the idea stops work;
  • Most successful events are due to the action of a small number of highly productive forces; most troubles are due to the action of a small number of destructive forces;
  • Most activities, group or individual, are a waste of time. They do not give anything real to achieve the desired result.

The Pareto principle is a rule of thumb. In other words, its truth can be confirmed in practice.

It finds its application in many areas. But, bearing in mind that by correctly choosing 20% ​​of the necessary actions, you can get 80% of the desired result, it is worth considering that subsequent efforts may not bring results at all. This idea is illustrated by the Pareto curve.

The Pareto Law: Characteristics and Examples of the 80/20 Principle

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It should be remembered that the distribution itself, like the numbers 80 and 20, cannot be considered unconditionally accurate, since they reflect a mnemonic rule, and not a specific truth. It is used in economics, management, political science, time management, for self-development.

Modern economic science also assigns an important place to the definition of the Pareto optimum, with which the first and second welfare theorems are inextricably linked. At the optimum, the welfare of society reaches its maximum, and the distribution of resources becomes optimal if any change in this distribution worsens the welfare of at least one subject of the economic system. Read more on Wikipedia (here).

It should be noted that the 80/20 rule, also called Zipf's law or power distribution, does not always work. Armed with school knowledge on calculating interest and Forbes magazine, you can see that the first three of the 100 richest people on the planet (B. Gates, K. Slim, and A. Ortega) together have as much money as the next 7 people from first ten. Even with the adjustment for the fact that the Pareto principle does not always fit perfectly under the 80/20 framework, but tends to them, there is a discrepancy. If we take the top ten, then her income is also equal to the income of the next 40 people. In numerical terms, the following equality comes out: 20% = 50%, 80% = 50%. Another violation of the Pareto principle. The actual distribution of the contribution of the greater and lesser part of the factors in real life is anything, it is not necessarily equal to 80/20.

The Pareto Law: Characteristics and Examples of the 80/20 Principle

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The 80/20 Law: Application and Examples

Why is the Pareto principle so important? We are accustomed to thinking that in any case it is not some factor that matters, but a complex. That in business you need to take care of every customer. That every call is equally meaningful. There can be many explanations for this – from knowledge instilled in school about the arithmetic mean and Newton's third law to logical attitudes acquired in the process of life. This does not make them unnecessary, just the scope of the Pareto principle is specific. He points out to us that when we analyze two sets of data relating to cause and effect, we will not necessarily get a balance in the end. As well as optionally, we get the distribution 80/20, as shown above. This is very valuable knowledge, but you need to understand when and where to apply it.

As in the case of peas in the garden of Vilfredo Pareto, the pattern he discovered manifests itself in different areas – from science to everyday life. Perhaps one of the most famous examples used to illustrate the Pareto principle is the 1960 US presidential campaign. R. Nixon spent the last months of the election race in constant traveling, as he made a reckless promise to travel around all the states, even such sparsely populated ones as Haiti. His rival, J. Kennedy, on the contrary, focused on performances in several of the most populous states. He later won.

The 80/20 law has been successfully implemented by IBM. In the early 1960s, its engineers identified the 20% of tasks that were used in 80% of computer work. The algorithm was changed, and the most popular calculations began to be made much easier, more convenient, and most importantly, faster. This gave a result – IBM left its competitors far behind.

The Pareto Law: Characteristics and Examples of the 80/20 Principle

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But let's leave the practice of large companies based on the application of the 80/20 law aside and consider how it can be useful to a particular person. Without exaggeration, the Pareto principle will come in handy in life for anyone who practices time management and asks questions about increasing efficiency, both personal and business. When compiling a to-do list, it is best to allocate no more than 10 tasks per day, of which 2 are global, requiring the main attention. When recalculated as a percentage, it becomes clear that this condition is a variation of the 80/20 theory.

If you have more than one job or income other than passive income, focus on no more than two of them. These should be the ones that bring you the most profit. Try to increase your productivity indicators in them by getting rid of other, ineffective activities. This attitude should be followed in your own business, paying attention to the main aspects, delegating secondary tasks.

The development of stress resistance will help to increase efficiency and, in general, have a positive effect on life. Psychologists have found that 20% of stressful situations cause 80% of all anxieties and worries experienced. Learn to avoid them, or at least minimize the negative impact.

Unfortunately, the Pareto principle does not give a clue as to what 20% of things we should focus on in order to achieve 80% of the result. It only indicates that they exist, but everyone must determine them for himself, based on many factors: the specifics of the profession, employment, interests. We wish you success in their definition!

Source: 4brain.ru