Pareto Principle Definition: How to Use the 80/20 Rule

The Pareto principle states that twenty percent of inputs lead to eighty percent of outcomes and that the inverse is also true. Mathematically speaking, it’s a power law probability distribution function—a phrase that describes a relationship in which a change to one figure results in a proportional change to the other figure.

The cumulative total (eighty percent and twenty percent equaling one hundred percent) resulting from Pareto’s law is not always hard and fast; it can be conditional on other factors. Still, results are generally within a standard deviation of the original eighty-twenty metric to an almost uncanny degree whenever and wherever you appropriately apply the principle. In other words, in such cases the use of eighty and twenty is more accurate than using random numbers but less accurate than using a perfect algorithm.

Professionals in various disciplines have used this parameter estimation tool for a collection of special cases and found that it applies to their unique needs. The Pareto principle goes by the additional names of the law of the vital few, the 80/20 rule, the principle of factor sparsity, or the Pareto rule.

Italian economist Vilfredo Pareto began to formulate this theorem when surveying the pea pods in his garden. He came to realize that twenty percent of his pea pods were responsible for an additional eighty percent of eventual germination and growth. He decided to apply the dictum to the economic situation in early twentieth-century Italy and discovered the same central truth: Twenty percent of the population held eighty percent of the wealth.

The Pareto principle migrated to the United States when Joseph M. Juran, a Romanian immigrant, management consultant, and former New York University professor, began to use the principle to assist business owners with their strategic planning initiatives. Since then, professionals have applied the Pareto principle to sports statistics, software analysis, economic issues, and other situations.

A Pareto chart is a data set meant to illustrate that twenty percent of inputs will lead to eighty percent of outcomes (a Pareto curve). Mathematicians illustrate Pareto diagrams as both line graphs and histograms (or bar graphs). In either case, they generally track these outcomes along a left or right vertical axis and the inputs along the horizontal axis.

The Pareto law follows principles similar to those of many other types of distribution functions. Here are five more common distribution principles and some of the mathematical functions or concepts they involve:

1. 1. Continuous distribution: This kind of function takes a variate (or random variable) and allows it to continuously assume different values throughout its distribution. Lognormal distribution, the cumulative distribution function, and continuous uniform distribution are other common examples of continuous distribution.
2. 2. Exponential distribution: This form of statistical distribution contains a shape parameter to track metrics like skewness (asymmetry) and kurtosis (steepness) on a graph. Exponential distribution, like the Pareto principle, tracks variables against specific powers and power laws.
3. 3. Generalized Pareto distribution: This is the mathematical name for the formula you use to understand how any metric achieves Pareto efficiency. It uses a scale parameter, shape parameter, and survival function (the latter provides the probability of a person or thing surviving past a specific period of time).
4. 4. Probability distribution: This umbrella term applies to all distribution forms and functions—like beta distribution, cumulative uniform distribution, the probability density function, and generalized Pareto distribution, to name a few—that track probability with quantiles and other metrics.
5. 5. Zeta distribution: Following a dictum of the linguist and statistician George Kingsley Zipf, zeta distribution operates as a useful alternative to Pareto distribution.

People can apply Pareto analysis to economic and statistical problems of all sorts. Here are three examples:

1. 1. Income taxes: In many different countries, twenty percent of the populace pays eighty percent of the taxes. This is derivative of the fact that the distribution of income itself breaks down along similar lines. As income increases among the few, they pay more in taxes percentage-wise; as it decreases among the many, they pay fewer taxes proportionally.
2. 2. Software and the Internet: As a reliable estimate, twenty percent of bugs (or miswritten code) cause eighty percent of the problems in software. Similarly, twenty percent of web files account for eighty percent of the file size distribution on the Internet as a whole. On average, twenty percent of internet forum or social media users generate eighty percent of the content on those sites as well.
3. 3. Wealth distribution: One of Pareto’s initial calculations found eighty percent of Italy’s distribution of wealth to be in twenty percent of the richest citizens’ hands. This has proven true long past his time and far outside his own nation’s borders. More up-to-date metrics like the Gini coefficient have come to the same conclusions about global wealth allocation. While some view this as proof some unique individuals simply excel more than others, others view it as an intolerable sign of income inequality.

You can apply this semi-abstract mathematical principle to far more human and immediate concerns. Try applying the Pareto principle in these three ways:

1. 1. Business management: If you run a business, you might have already discovered that about twenty percent of your customers are responsible for eighty percent of your business. On the downside, twenty percent of your customers are likely responsible for eighty percent of customer complaints. Similarly, twenty percent of your employees likely do eighty percent of the work for your company. Keeping this in mind can help you increase the expected value of your company and enact better quality control.
2. 2. Time management: The top twenty percent of your most important tasks should account for eighty percent of the entire amount of time in your day—that is to say, you should spend most of your time on the tasks that are most important to you. Record how much time you are spending on specific things—scrolling through apps and social media sites, working on projects, running errands, talking on the phone, and so on. Now adjust your schedule according to the Pareto principle to practice better time management so you can ultimately meet your goals.
3. 3. To-do lists: Try making to-do lists with the Pareto principle in mind. Create an exhaustive list of everything you want or need to accomplish. Rather than trying to complete eighty percent or more of all those tasks, circle only the top twenty percent—the tasks that you find to be the most important that day. Give these circled tasks your full effort. The following day, you can make a new exhaustive list and determine your updated top twenty percent most important tasks. Again, focus on just those tasks. Repeat this process every day to help you with your prioritization and overall decision-making skills.

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