The Pareto Principle
Introduction
The Pareto principle is named after the Italian economist Vilfredo Pareto. The Pareto principle states that 80 % of the output is caused by 20 % of the input. This principle advocates that there is a general imbalance between the input and the output. Pareto principle is also called as 80-20 principle, the principle of least effort, the principle of imbalance etc. It might seem that the Pareto principle is absurd, but the fact is that if we analyse data we will see the emergence of the Pareto principle time after time.
Vilfredo Pareto observed the imbalance while he was analysing the land ownership among the Italian population. What he found out was that 80% of the land in Italy was owned by 20 % of the people. Vilfredo Pareto was amused and this discovery and he carried out several studies on other countries and found the prevalence of similar distribution.
How can we use the Pareto principle in our life?
The Pareto principle can be used as a prioritization technique. For example, if you own a company, 80 % of the profit might be a result of 20 % of the products that you are offering. This has huge implications because you can concentrate more on the 20 % of the products that are bringing you the majority of the profit. Additionally, you may find out ways to improve the 80 % of the products that are bringing you less profit and thereby increase your overall profitability. On the contrary, you may also choose to limit the production of 80 % of the products which is bringing you way less profit. It is all up to you to decide.
The areas in which you can apply the Pareto principle are up to your imagination. I am listing here some general examples where the Pareto principle might be applied:
- 20 % of clients may bring 80% of the profit.
- 20 % of drivers may cause 80% of accidents.
- 20 % of clothes may wear 80% of the time.
- 20 % of computer code may be used 80% of the time.
Conclusion:
Even though the Pareto principle is useful, do keep in mind that the Pareto principle is not a law it is just an observation. It might not apply to all situations all the time. Therefore, use the Pareto principle with a pinch of salt. We can combine the Pareto principle with the Prices Law and we will get a remarkable idea of how the world works and it might just blow your mind. More on that in the next article.