Pareto Principle (The 80/20 Rule) & Pareto Analysis

Statistics Definitions > The Pareto Principle

Contents (Click to Skip to That Section):

What is the Pareto Principle?
Applying the 80/20 Rule to Your Life
The Pareto Principle in Business
Pareto Analysis and The Pareto Diagram
The Pareto Principle and My Jeopardy Challenge
Other Names for the Pareto Principle

What is the Pareto Principle?

Simply put, the Pareto Principle is an unscientific “law” that states: 80% of effects come from 20% of causes. In other words, most of what we do has little effect. The principle comes from the Pareto distribution and illustrates that many things don’t have an even distribution. It was originally written by Italian economist Vilfredo Pareto in 1896, who stated that 20% of the population in Italy holds 80% of the wealth. In the 1930s-1940s, Dr. Joseph Juran recognized the principle can be applied universally to almost any situation where there is an uneven distribution. For example:

80% of output is produced by 20% of workers.
20% of customers produce 80% of the revenue.
80% of a teacher’s time is taken up by 20% of the students.
80% of retail sales are made by 20% of brands.
80% of your website’s traffic comes from 20% of your posts.
80% of STDs are transmitted by 20% of the population.
80% of RNA-viruses are shed by 20% of birds (see this PLos One article).
80% of movie rentals are 20% of the available titles (usually the new releases!).
1% of the world population holds half of the global wealth.

I could go on with a list of dozens of these “Paretoisms.” If you want some more examples, check out J.Motil’s Paretoism’s page.

The numbers don’t have to add up to 100%. And there doesn’t have to be an actual 80-20 split in the distribution. In fact, you’ll rarely come across a distribution of anything that’s exactly 80-20, although many things come close. The main idea behind the principle is just to recognize that a small number of cases produce a large percentage of the effect.

The distribution split isn’t always unfair, and it doesn’t always need “fixing.” For example, 80% of traffic travels on 20% of the roads. This can be beneficial for maintenance crews who can concentrate on that 20% of roads; it can also be great for residential neighborhoods, who benefit from reduced traffic flow.

Applying the 80/20 Rule to Your Life

Many of us want to more effectively manage our time, so that we concentrate on the 20% of tasks that are important. If you want to put the Pareto Principle into action in your life so that you are less distracted with small tasks (or distractions), Harvard Business Review suggests prioritizing tasks that you have to take care of each day:

Write down your top 6 priorities for tomorrow.
Cross out the bottom 5.
Write down your top priority on a Post-It note and tape it where you’ll constantly see it.
Work on your top priority item for 90 minutes in the morning. If you feel tempted to check email, voicemail or other tasks that take you off track, write them down. If you take the time to write down “check the weather” before you actually do it, the chances are you’ll be stopped in your tracks.

I usually write or revise one article for StatisticsHowTo.com every day. I prioritize in a slightly different way, allowing myself “free time” as long as I keep on schedule to put in 5-6 hours writing. What this sometimes means is I end up writing until 2 a.m. if I procrastinate. But I wake up the next day feeling like I accomplished something the day before. Things that I would like to get done, but don’t get around to (low-priority stuff like working on my art, checking Google Webmaster for errors, or looking for a gift) simply get postponed until the next day. I keep on reminding myself that Warren Buffett didn’t make his fortune by habitually checking his email, thinking about dinner, or shopping Amazon for the latest cool book. While I’m on the subject of Warren Buffett, here’s what his philosophy is (quoted by Mary Buffett and David Clark in The Tao of Warren Buffett):

“Warren decided early in his career it would be impossible for him to make hundreds of right investment decisions, so he decided that he would invest only in the business that he was absolutely sure of, and then bet heavily on them. He owes 90% of his wealth to just ten investments.”

Everyone has a different way of prioritizing. A lot depends on your job situation, your family life, your other responsibilities. The key is to find your own way to prioritize. And stick to it.

The Pareto Principle in Business

The Pareto principle is often used as a business tool. For example, Paula Rooney published this insight into Microsoft’s use of the rule on October 3, 2002:

“In recent months, Microsoft has learned that 80 percent of the errors and crashes in Windows and Office are caused by 20 percent of the entire pool of bugs detected, and that more than 50 percent of the headaches derive from a mere 1 percent of all flawed code.”

General ways you can apply the rule to your business:

Figure out what tasks you do 20% of the time that produce 80% of results and focus on that 20%.
Identify which 20% of customers produce 80% of revenue and focus on finding and retaining those types of customers.
Find out which 20% of items are consuming 80% of resources and use this information to cut costs.

Pareto Analysis and the Pareto Diagram

Pareto analysis is a statistical way to identify the 20% of tasks or problems that you should be concentrating on. The usual way of identifying those tasks is with a Pareto Diagram. There isn’t a whole lot of difference between a plain old bar chart and a Pareto diagram, except that the chart ranks your items from greatest to least.

The Pareto diagram lists categories of what is taking up the time/resources along with a relative frequency (adding up to 100%). The Pareto diagram is basically a vertical bar chart with categories listed in order of magnitude, from left to right. This allows you to easily see which tasks or resources make up the top 20%.

Relative frequency is calculated as follows:
(Category contribution / Total) * 100%
Let’s say you spend 13.5 hours out of a 40 hour work week on a particular task. You would get:
(13.5/40) * 100 = 33.75%
You can then plot these figures on a chart to more clearly see what you’re spending the most time on. The chart shows hours spent in blue bars (with a legend on the left) and percentage of time as the orange line (with a legend on the right). For example, the category “Writing Article” takes up 13.5 hours (left sidebar), which is about 35% of time spent (right sidebar).

Options to make your Pareto Diagram:

Excel instructions on the Winthrop University site. Excel isn’t the easiest of software for making these charts, but it is possible. These instructions are pretty comprehensive with lots of images.
Minitab: enter your data into two columns (one column with the name of the item and a second column with a count). Choose Stat > Quality Tools > Pareto Chart. Make sure to select “count” as your frequency data.
SPSS: type your data in two columns (one column with the name of the item and the next column with the count). Choose “Analyze” and then “Quality Control.” After you have clicked “Pareto Chart,” click “Simple.” You’ll then define your variables as usual.

The Pareto Principle and My Jeopardy Challenge

I’m a big Jeopardy fan. This year I think I’m going to try out for the show. As the Pareto principle is applicable to just about anything in the universe, I started to wonder if the Pareto Principle could be applied to the Jeopardy learning curve. In other words:

Do 80% of the questions come from 20% of the “sphere of knowledge”? The “sphere of knowledge” being the types of things you could be expected to know if you’re on Jeopardy (authors, parts of the body, rivers of the world etc.).
Should I spend 80% of my time focusing on a particular learning strategy? For example, should I be reading general knowledge books? Focusing on my weakest area? Studying old Jeopardy questions?

One thing I know for sure is that when I take the online test, I’d better be in the top 20% of the estimated 100,000 test-takers. Jeopardy doesn’t release numbers, but you do need to get above 35/50 (that’s 70%). If you pass, you’re then in a random drawing. And then, if you get invited to the audition and pass that, you’re in a contestant pool.

That’s a lot of unknowns. So the only thing for sure is that I need to be better than the majority of other contenders. Which means I’ll have to put in a lot more effort than the majority of people. Or, I use the Pareto Principle to become a more successful contestant by placing maximum effort into the activities more likely to make me a success.

There’s a book out there called “Secrets of the Jeopardy Champions.” You can bet that there aren’t any secrets in that book (seeing as it’s been a constant seller for 20+ years!). It does give you lists of things to study, which is definitely useful. But seeing as every potential Jeopardy contestant is also going to buy the book and study from it, that hardly puts me in the top 20%.

So let’s cut to the strategy I’m going to use. It’s not a fast and dirty technique for sure. And at the time of writing, it’s completely unproven. But it’s going to put me in the top 20% for effort and hopefully it will put me in the top 20% of the contestant pool as well.

Here’s how I’ve been using the Principle to study (for 30 hours a week!):

Take a historical Jeopardy test and get my baseline score.
Study general knowledge books for a week (I’ve got a home library on just about every subject likely to appear on the show).
Take another test. Note the difference.
Study flashcards of historical Jeopardy questions for a week.
Take another test. Note the difference.
Watch the show, jot down topics I don’t know. Study those for a week.
Take another test. Note the difference.
Study flashcards of my stronger subjects for a week to fill in the gaps.
Take another test. Note the difference.
Finally, look at the score differences to see which week resulted in my greatest increase.

And the winner was…studying flashcards of historical Jeopardy questions. If you’ve added up all of those weeks, you’ll find that I spent a month on preparation before I sat down for some serious studying. I’m betting that 80% of potential contestants won’t put that much effort into the preparation. And I’m also betting that putting my effort into historical Jeopardy questions (rather than random trivia), that I’m placing my effort into the right place to get the maximum result.

As the 200,000 or so questions in the J-Archive are a little overwhelming, I narrowed my focus to those questions that are more likely to come up than others. For example, out went questions about news for some years and in went general science. I’m more likely to be asked what the first cervical vertebra is (the Atlas) rather than a news story from 1991. I won’t post all the ways I did that in this article (I’ll probably make a separate post in the future), as I’ll be getting way off topic. My point is that you can pretty much use the Pareto Principle for anything you want in life, even if it’s something as random as wanting to appear on Jeopardy.

Other Names for the Pareto Principle

The Pareto Law or Pareto’s Law.
Pareto Theory.
The 80-20 Rule .
The 80-20 Principle.
Pareto’s 80-20 Rule.
The Principle of Imbalance.
The Principle of Least Effort.
The Law of the Vital Few and The Trivial Many.