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can also refer to Pareto efficiency. The Pareto principle (also known as the 80 20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of t he effects come from 20% of the causes.[1][2] Business-management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of th e land in Italy was owned by 20% of the population; he developed the principle b y observing that 20% of the pea pods in his garden contained 80% of the peas.[2] It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients". Mathematically, where something is shared among a sufficientl y large set of participants, there must be a number k between 50 and 100 such th at "k% is taken by (100 - k)% of the participants". The number k may vary from 5 0 (in the case of equal distribution, i.e. 100% of the population have equal sha res) to nearly 100 (when a tiny number of participants account for almost all of the resource). There is nothing special about the number 80% mathematically, bu t many real systems have k somewhere around this region of intermediate imbalanc e in distribution.[3] The Pareto principle is only tangentially related to Pareto efficiency, which wa s also introduced by the same economist. Pareto developed both concepts in the c ontext of the distribution of income and wealth among the population. Contents 1 2 3 4 5 6 7 In economics In business In software Occupational health and safety Other applications Mathematical notes Equality measures 7.1 Gini coefficient and Hoover index 7.2 Theil index 8 See also 9 References 10 Further reading 11 External links In economics The original observation was in connection with population and wealth. Pareto no ticed that 80% of Italy's land was owned by 20% of the population.[4] He then ca rried out surveys on a variety of other countries and found to his surprise that a similar distribution applied. Due to the scale-invariant nature of the power law relationship, the relationshi p applies also to subsets of the income range. Even if we take the ten wealthies t individuals in the world, we see that the top three (Carlos Slim Hel, Warren Bu ffett, and Bill Gates) own as much as the next seven put together.[5] A chart that gave the inequality a very visible and comprehensible form, the socalled 'champagne glass' effect,[6] was contained in the 1992 United Nations Dev elopment Program Report, which showed the distribution of global income to be ve

ry uneven, with the richest 20% of the world's population controlling 82.7% of t he world's income.[7] Distribution of world GDP, 1989[8] Quintile of population Income Richest 20% 82.70% Second 20% 11.75% Third 20% 2.30% Fourth 20% 1.85% Poorest 20% 1.40% The Pareto principle has also been used to attribute the widening economic inequ ality in the United States to 'skill-biased technical change' i.e. income growth a ccrues to those with the education and skills required to take advantage of new technology and globalization. In business The distribution is claimed to appear in several different aspects relevant to e ntrepreneurs and business managers. For example: 80% 80% 80% 80% 80% of of of of of your your your your your profits come from 20% of your customers complaints come from 20% of your customers profits come from 20% of the time you spend sales come from 20% of your products sales are made by 20% of your sales staff[9]

Therefore, many businesses have an easy access to dramatic improvements in profi tability by focusing on the most effective areas and eliminating, ignoring, auto mating, delegating or retraining the rest, as appropriate. In software In computer science and engineering control theory such as for electromechanical energy converters, the Pareto principle can be applied to optimization efforts. [10] For example, Microsoft noted that by fixing the top 20% most reported bugs, 80% of the errors and crashes would be eliminated.[11] Occupational health and safety The Pareto principle is used in occupational health and safety to underline the importance of hazard prioritization. Assuming 20% of the hazards will account fo r 80% of the injuries and by categorizing hazards, safety professionals can targ et those 20% of the hazards that cause 80% of the injuries or accidents. Alterna tively, if hazards are addressed in random order, then a safety professional is more likely to fix one of the 80% of hazards which account for just 20% of the i njuries.[12] Aside from ensuring efficient accident prevention practices, the Pareto principl e also ensures hazards are addressed in an economical order as the technique ens ures the resources used are best used to prevent the most accidents.[13] Other applications In the systems science discipline, Epstein and Axtell created an agent-based sim ulation model called SugarScape, from a decentralized modeling approach, based o n individual behavior rules defined for each agent in the economy. Wealth distri bution and Pareto's 80/20 principle became emergent in their results, which sugg ests the principle is a natural phenomenon.[14] The Pareto principle has many applications in quality control.[citation needed] It is the basis for the Pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle serves as a baseline for ABC-analys is and XYZ-analysis, widely used in logistics and procurement for the purpose of optimizing stock of goods, as well as costs of keeping and replenishing that st ock.[15]

The Pareto principle was a prominent part of the 2007 The 4-Hour Workweek by Tim Ferriss. Ferriss recommended focusing one's attention on those 20% of customers who contribute 80% of the income. More notably, he also recommends 'firing' ref using to do business with those 20% of customers who take up the majority of one 's time and cause the most trouble.[16] In health care in the United States, 20% of patients have been found to use 80% of health care resources.[17] Several criminology studies have found 80% of crimes are committed by 20% of cri minals.[18] Drawing on several sources including the study of rats in crowded environments a nd communist management of American POWs in the Korean War, the writer Colin Wil son ascertained that 20% of humans are "power men", suited to governing (and, of ten, exploiting) the other 80% of humanity.[citation needed] In the financial services industry, this concept is known as profit risk, where 20% or fewer of a company's customers are generating positive income, while 80% or more are costing the company money.[19] Mathematical notes The idea has rule of thumb application in many places, but it is commonly misuse d. For example, it is a misuse to state a solution to a problem "fits the 80 20 ru le" just because it fits 80% of the cases; it must also be implied that this sol ution requires only 20% of the resources needed to solve all cases. Additionally , it is a misuse of the 80 20 rule to interpret data with a small number of catego ries or observations. This is a special case of the wider phenomenon of Pareto distributions. If the P areto index a, which is one of the parameters characterizing a Pareto distributi on, is chosen as a = log45 1.16, then one has 80% of effects coming from 20% of causes. It follows that one also has 80% of that top 80% of effects coming from 20% of that top 20% of causes, and so on. Eighty percent of 80% is 64%; 20% of 2 0% is 4%, so this implies a "64-4" law; and similarly implies a "51.2-0.8" law. Thus, the 80-20 rule would imply that 64% of wealth is held by 4% of the people; however, one cannot reverse this and say that 4% of the wealth is held by the p oorer 64% of the people. The term 80 20 is only a shorthand for the general principle at work. In individua l cases, the distribution could just as well be, say, 80 10 or 80 30. There is no ne ed for the two numbers to add up to the number 100, as they are measures of diff erent things, e.g., 'number of customers' vs 'amount spent'). However, each case in which they do not add up to 100%, is equivalent to one in which they do; for example, as noted above, the "64-4 law" (in which the two numbers do not add up to 100%) is equivalent to the "80 20 law" (in which they do add up to 100%). Thus , specifying two percentages independently does not lead to a broader class of d istributions than what one gets by specifying the larger one and letting the sma ller one be its complement relative to 100%. Thus, there is only one degree of f reedom in the choice of that parameter. Adding up to 100 leads to a nice symmetry. For example, if 80% of effects come f rom the top 20% of sources, then the remaining 20% of effects come from the lowe r 80% of sources. This is called the "joint ratio", and can be used to measure t he degree of imbalance: a joint ratio of 96:4 is very imbalanced, 80:20 is signi ficantly imbalanced (Gini index: 60%), 70:30 is moderately imbalanced (Gini inde x: 40%), and 55:45 is just slightly imbalanced. The Pareto principle is an illustration of a "power law" relationship, which als

o occurs in phenomena such as brush fires and earthquakes.[20] Because it is sel f-similar over a wide range of magnitudes, it produces outcomes completely diffe rent from Gaussian distribution phenomena. This fact explains the frequent break downs of sophisticated financial instruments, which are modeled on the assumptio n that a Gaussian relationship is appropriate to, for example, stock price movem ents.[21] Equality measures Gini coefficient and Hoover index Using the "A : B" notation (for example, 0.8:0.2) and with A + B = 1, inequality measures like the Gini index and the Hoover index can be computed. In this case both are the same. H=G=\left|2A-1 \right|=\left|1-2B \right| \, A:B = \left( \tfrac{1+H}{2} \right): \left( \tfrac{1-H}{2} \right) Theil index The Theil index is an entropy measure used to quantify inequalities. The measure is 0 for 50:50 distributions and reaches 1 at a Pareto distribution of 82:18. H igher inequalities yield Theil indices above 1.[22] T_T=T_L=T_s = 2 H \, \operatorname{arctanh} \left( H \right).\, See also Wikimedia Commons has media related to: Pareto principle 1% rule (Internet culture) 10/90 gap Benford's law Diminishing returns Elephant flow Mathematical economics Megadiverse countries Ninety-ninety rule Pareto distribution Pareto priority index Parkinson's law Principle of least effort Profit risk Sturgeon's law The Long Tail Vitality curve Wealth condensation Zipf's law References ^ Bunkley, Nick (March 3, 2008), "Joseph Juran, 103, Pioneer in Quality Cont rol, Dies", New York Times ^ a b What is 80/20 Rule, Pareto s Law, Pareto Principle ^ Newman, MEJ. "Power laws, Pareto Distributions, and Zipf's law". p. 11. Re trieved 10 April 2011. ^ Pareto, Vilfredo; Page, Alfred N. (1971), Translation of Manuale di econom ia politica ("Manual of political economy"), A.M. Kelley, ISBN 978-0-678-00881-2 ^ The Forbes top 100 billionaire rich-list, This is Money ^ Gorostiaga, Xabier (January 27, 1995), "World has become a 'champagne glas s' globalisation will fill it fuller for a wealthy few", National Catholic Repor ter

^ United Nations Development Program (1992), 1992 Human Development Report, New York: Oxford University Press ^ Human Development Report 1992, Chapter 3, retrieved 2007-07-08 ^ Living Life the 80/20 Way by Robert Koch ^ Gen, M.; Cheng, R. (2002), Genetic Algorithms and Engineering Optimization , New York: Wiley ^ Rooney, Paula (October 3, 2002), Microsoft's CEO: 80 20 Rule Applies To Bugs , Not Just Features, ChannelWeb ^ Woodcock, Kathryn (2010). Safety Evaluation Techniques. Toronto, ON: Ryers on University. p. 86. ^ "Introduction to Risk-based Decision. Making". USCG Safety Program. United States Coast Guard. Retrieved 14 January 2012. ^ Epstein, Joshua; Axtell, Robert (1996), Growing Artificial Societies: Soci al Science from the Bottom-Up, MIT Press, p. 208, ISBN 0-262-55025-3 ^ Rushton, Oxley & Croucher (2000), pp. 107 108. ^ Ferris, Tim (2006), The 4-Hour Workweek, Crown Publishing ^ Myrl Weinberg: In health-care reform, the 20-80 solution | Contributors | projo.com | The Providence Journal ^ Career Criminals: Who Are They and What Should Society Do About Them? | Ho w Do I Get Off Drugs? ^ Profit Risk ^ Bak, Per (1999), How Nature Works: the science of self-organized criticali ty, Springer, p. 89, ISBN 0-387-94791-4 ^ Taleb, Nassim (2007), The Black Swan, pp. 229 252, 274 285 ^ On Line Calculator: Inequality Further reading Bookstein, Abraham (1990), "Informetric distributions, part I: Unified overv iew", Journal of the American Society for Information Science 41 (5): 368 375, doi :10.1002/(SICI)1097-4571(199007)41:5<368::AID-ASI8>3.0.CO;2-C Klass, O. S.; Biham, O.; Levy, M.; Malcai, O.; Soloman, S. (2006), "The Forb es 400 and the Pareto wealth distribution", Economics Letters 90 (2): 290 295, doi :10.1016/j.econlet.2005.08.020 Koch, R. (2001), The 80/20 Principle: The Secret of Achieving More with Less , London: Nicholas Brealey Publishing Koch, R. (2004), Living the 80/20 Way: Work Less, Worry Less, Succeed More, Enjoy More, London: Nicholas Brealey Publishing, ISBN 1-85788-331-4 Reed, W. J. (2001), "The Pareto, Zipf and other power laws", Economics Lette rs 74 (1): 15 19, doi:10.1016/S0165-1765(01)00524-9 Rosen, K. T.; Resnick, M. (1980), "The size distribution of cities: an exami nation of the Pareto law and primacy", Journal of Urban Economics 8 (2): 165 186, doi:10.1016/0094-1190(80)90043-1 Rushton, A.; Oxley, J.; Croucher, P. (2000), The handbook of logistics and d istribution management (2nd ed.), London: Kogan Page, ISBN 978-0-7494-3365-9. External links About.com: Pareto's Principle Wealth Condensation in Pareto Macro-Economies Categories: Statistical laws Rules of thumb Tails of probability distributions Statistical principles Adages Navigation menu

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