Pareto principle
The Pareto principle (also known as the 80/20 rule, the law of the vital few and the principle of factor sparsity[1][2]) states that for many outcomes, roughly 80% of consequences come from 20% of causes (the "vital few").[1]
For the optimal allocation of resources, see Pareto efficiency.
In 1941, management consultant Joseph M. Juran developed the concept in the context of quality control and improvement after reading the works of Italian sociologist and economist Vilfredo Pareto, who wrote in 1906 about the 80/20 connection while teaching at the University of Lausanne.[3] In his first work, Cours d'économie politique, Pareto showed that approximately 80% of the land in the Kingdom of Italy was owned by 20% of the population. The Pareto principle is only tangentially related to the Pareto efficiency.
Mathematically, the 80/20 rule is roughly described by a power law distribution (also known as a Pareto distribution) for a particular set of parameters. Many natural phenomena are distributed according to power law statistics.[4] It is an adage of business management that "80% of sales come from 20% of clients."[5]
History[edit]
In 1941, Joseph M. Juran, a Romanian-born American engineer, came across the work of Italian polymath Vilfredo Pareto. Pareto noted that approximately 80% of Italy's land was owned by 20% of the population.[6][4] Juran applied the observation that 80% of an issue is caused by 20% of the causes to quality issues. Later during his career, Juran preferred to describe this as "the vital few and the useful many" to highlight that the contribution of the remaining 80% should not be discarded entirely.[7]
Applications[edit]
Economics[edit]
Pareto's observation was in connection with population and wealth. Pareto noticed that approximately 80% of Italy's land was owned by 20% of the population.[6] He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.
A chart that demonstrated the effect appeared in the 1992 United Nations Development Program Report, which showed that the richest 20% of the world's population receives 82.7% of the world's income.[13] However, among nations, the Gini index shows that wealth distributions vary substantially around this norm.[14]