The 80-20 rule is a principle established by Vilfredo Pareto (1848, Paris-1923, Geneva), an Italian economist and sociologist who contributed with his theory on mass and elite interaction to the socio-economy field, and who is also known for his application of mathematics to the economic analysis. Originally, the Pareto principle was an observation made by the Italian economist when he found out that 80% of Italy’s wealth belonged to only 20% of the entire population. In other terms, the Pareto principle is a theory that most things in life, especially when speaking in economic terms, are not distributed evenly. For example, 80% of the revenues are generated by 20% of the customers, or 20% of the workers create 80% of the value and 20% of the input creates 80% of the outcome, and so on.
The term Pareto principle was not created by Pareto as it might look, but by Dr. Joseph Juan who expanded on the idea of Pareto arguing how it can be applied as a universal principle after. Dr. Joseph believed that 80% of a company’s revenues come from 20% of its customers and that 80% of production problems would be caused by only 20% of all the possible causes. By applying the Pareto principle to his field of work, which was operations management, he could help improve their business production after he noticed that 80% of the production problems were caused by only 20% of the production methods.
People tend usually to misunderstand something about the Pareto principle and they think that the numbers 20 and 80 in this principle must add to 100, which is wrong! The numbers don’t have to be always 20% and 80% exactly, but the key point is that most things in life are not distributed evenly either it was efforts, rewards, incomes, outcomes, etc. but some contribute more than others. What Pareto's principle tries to tell us is that life is not fair and that in a perfect world every unit of work, for example, will contribute the same amount.
By understanding the Pareto principle, you will realize how the majority of results come from a minority of inputs.
Besides growing businesses with only some inputs, people use the Pareto principle on managing their time. Most people think they have to work excessively and for a long time to produce good outcomes, but with the 80%-20% rule, people have become more aware of how things work and instead of focusing on one important task, they tend to spread out their time on several tasks.
One other common use of the principle is in relationships where many people aspire to have as many friends as possible, just to find afterward that they become overwhelmed with trying to maintain all these relationships. With the Pareto principle, we can determine which 20% of these relationships are more valuable and supportive, and according to the rule of Pareto, spending your time socializing only with this 20% can bring greater personal gains.
This principle can also be used in coming up with the best decisions in problem-solving by identifying the main causes of the problem you are trying to solve instead draining your energy by running after every single thin thing. By developing a plan that helps in focusing on the 20% causes that result in the majority of your problems, your problem-solving process will become more efficient.
The 80%-20% rule can be useful in many fields, either in running your financial life, with your personal life or in your business. It’s a principle with many advantages to shortcutting things.