THE PARETO PRINCIPLE

In a nutshell, the Pareto principle basically states that approximately 80 percent of results come from 20 percent of causes.

PEA PLANT ORIGINS

The principle was named after the Italian economist Vilfredo Pareto (1848–1923) who noticed that 20 percent of the pea plants in his garden generated 80 percent of healthy pea pods.

He began to apply this rule broadly across society and conducted studies showing that around 80 percent of the land in Italy was owned by 20 percent of the populace. Pareto carried out observations in other countries and found a similar distribution.

Pareto had discovered a recurring pattern that crops up all around us; for example, in terms of population density, business efficiency, and consumer spending habits. It’s also known as the eighty–twenty rule.

EXAMPLES OF THE EIGHTY–TWENTY RULE

Twenty percent of sales reps generate 80 percent of sales.

Twenty percent of software bugs cause 80 percent of crashes.

Twenty percent of customers account for 80 percent of profits.

Eighty percent of tax is paid by 20 percent of the population.

PARETO DISTRIBUTION

In statistics, the Pareto distribution is a probability distribution with a power-law form,

where α > 0, and x_m is the lower bound of x. This produces a distribution with a slowly declining tail.

The Pareto principle corresponds to the special case when α = ln(5) / ln(4) ≈ 1.161. Where ln is the logarithm to base e.

Sociological data often conforms to the Pareto distribution. For example, the largest percentage of people live in a small number of cities.