As featured in The Wall Street Journal, Money Magazine, and more!
     

The Pareto Principle: When to Apply, When to Ignore

This article was written by in Personal Development. 6 comments.


In the late nineteenth century, an economist named Vilfredo Pareto noticed that 80% of the land in Italy was owned by 20% of the population. About a half century later, a management consultant named Joseph Juran discovered Paerto’s observation and developed the concept of “the vital few and the trivial many,” and used what came to be known as Pareto’s Principle of 80/20 to offer business quality management advice that is still used today: 80% of your problems are due to 20% of the causes.

Juran wrote about this concept generally and word spread and this thought grew in popularity, it extended beyond quality management. Others have conjectured that in a business, 20% of salespeople are responsible for 80% of sales. 20% of a store’s stock take up 80% of warehouse space, and 20% of all consumers stimulate 80% of the economy. It’s a good thing Pareto didn’t live in the United Kingdom, where over 50% of land was owned by the Church and the Royal Family; he never would have discovered this supposed truism.

Tim Ferriss called upon the Pareto Principle in The 4-Hour Work Week: Escape 9-5, Live Anywhere, and Join the New Rich, calling for those who wish to optimize their life (and join the new rich) to outsource a certain amount of tasks contributing to 80% of an individuals total number of annoyances. As you might have guessed, Ferriss claims that the cause of 80% of your annoyances is 20% of your tasks.

If anything, the 80/20 “rule” should just be considered a rough estimation. Not all situations follow this pattern. I can think of many examples where the “rule” should be 50/50. Here is one. The Pareto Principle, in a modern application, would say that 80% of the work in any organization is performed by 20% of the workforce. That may be true for a team where the members are not required to put forth full effort. Pareto’s hypothesis would say that 80% of a symphony would be performed by 20% of an orchestra. I wouldn’t want to be the conductor of that ensemble.

Here’s how the Pareto Principle might hold true in other situations.

Pareto Principle in personal finance. It may be true that 20% of your expense categories account for 80% of your overall spending. Or it may be true that 30% of your categories account for 95%. (The numbers don’t have to add up to 100, nor are these two situations mutually exclusive.) Regardless of the ratio, it does make some sense to spend the most effort to reduce the categories that have the biggest effect on your expenses. Pareto Principle probably passes.

Pareto Principle in investments. I’ve read that 20% of your investments contribute to 80% of your return. The solution would then be obvious: enhance the ability for your money to make money by selling off the 80% of your portfolio that is not contributing to your wealth. I think that’s a crazy suggestion. Today’s lackluster stock — if you purchased it with a long-term goal in mind and performed due diligence before the purchase — might be tomorrow’s star performer. Pareto Principle fails. There is one question to consider: Do 20% of the stocks in any particular exchange account for 80% of the volume within any particular period?

Pareto Principle in staff management. Assuming the Pareto Principle is true for a large organization, you might come to believe that 80% of employee productivity is a result of 20% of the work force. Whether you fire the other 80% or just reward only the productive 20%, your base of employees will shrink. Further applications of the Pareto Principle will continue this trend; you’ll have to hire new employees. Do 20% of the people you interview leave 80% of the favorable impressions? Pareto Principle fails.

Pareto Principle in parenting and teaching. You may find that 20% of your children show 80% of the total promise through their work in school or through their socialization skills. This is the corollary to the idea that 20% of your problems would come from 80% of your children or students. Do you nurture and love the top 20% of your children more than the rest? Do teachers teach only to the top 20% of the students in a class? I hope not. Pareto Principle fails.

The biggest danger with abiding by the Pareto Principle is missing something important within the group ignored or neglected when the focus is on the troublesome 20%.

Here are a few things to take away:

  • The Pareto Principle, although sometimes known as the “80/20 Rule,” is not a rule at all and is not accurate in all situations.
  • Joseph Juran later revised his concept to be “the vital few and the useful many” rather than trivial to emphasize that anything beyond the vital should not be ignored by default.
  • If nothing else, the Pareto Principle is a reminder to look at the issues that cause the biggest problems and focus on the tasks that make have the most effect.

Published or updated October 5, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,372
Rank: Platinum
About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar Smithee ♦1,358 (Quarter)

Thanks for tackling this. There ought to be a database or something for inappropriate applications of the 80/20 rule.

Reply to this comment

avatar David

I just saw your tweet saying that you thought more people would be disagreeing with you here.

I would guess smart people—and I’m going to complement your readers and assume they are an intelligent bunch ;) —know that although it’s called the 80/20 “rule”, it’s far more an approximation than a rule. Thus, your explanation makes total sense.

That said, I still love trying to apply the “rule” wherever I can, because it’s amazing how effective it can be when you focus most of your effort on the most important stuff, whether it’s 80/20, 60/40, 50/50 etc.

Reply to this comment

avatar Paul @ FiscalGeek

Honestly I’ve seen it prove itself out in several cases. For sure in my blogging 20% of my posts bring in 80% of my visitors and it’s what causes me to make the 20% the 80%. What did I just say, I think I confused myself.

Reply to this comment

avatar Twiggers

The teaching/parenting example could pass. Psychological research has consistently found that teachers spend more time with students who they perceive as having the most ability or the ones they think will benefit most from their attention (i.e. the ones with higher IQs). Parents (not all, but many) will do similar things….little Johnny shows more promise in sports than little Jessica so the parents devote more time to enhancing Johnny’s athletic ability.

Reply to this comment

avatar Jason Wier

I would like to comment (mostly because you want some). For the staff management, the 80/20 rule would apply mostly to a per-employee productivity. 20 percent of the time worked is 80% of productivity. 20% of email has the best 80% of information.

Reply to this comment

avatar Eric

I just know that when I hear Pareto Principle, I think of utility functions and microeconomics. I guess my college education did do something…..

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: