Wednesday, July 19, 2017

The Pareto Principle

The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who noted the 80/20 connection while at the University of Lausanne in 1896, as published in his first paper, "Cours d'├ęconomie politique". Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that about 20% of the peapods in his garden contained 80% of the peas.

It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients." Mathematically, the 80/20 rule is roughly followed by a power law distribution (also known as a Pareto distribution) for a particular set of parameters, and many natural phenomena have been shown empirically to exhibit such a distribution.

The Pareto principle is only tangentially related to Pareto efficiency. Pareto developed both concepts in the context of the distribution of income and wealth among the population.

In Economics

The original observation was in connection with population and wealth. Pareto noticed that 80% of Italy's land was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.

A chart that gave the inequality a very visible and comprehensible form, the so-called 'champagne glass' effect, was contained in the 1992 United Nations Development Program Report, which showed that distribution of global income is very uneven, with the richest 20% of the world's population controlling 82.7% of the world's income.

In Science

The more predictions a theory makes, the greater the chance is of some of them being cheaply testable. Modifications of existing theories make many fewer new unique predictions, increasing the risk that the few predictions remaining will be very expensive to test.

In Software

The more predictions a theory makes, the greater the chance is of some of them being cheaply testable. Modifications of existing theories make many fewer new unique predictions, increasing the risk that the few predictions remaining will be very expensive to test.

In Sports

It is said that about 20% of sportsmen participate in 80% of big competitions and out of them, 20% win 80% of the awards. This could also be applied to teams in many popular games.

The Pareto principle has also been applied to training, where roughly 20% of the exercises and habits have 80% of the impact and the trainee should not focus so much on a varied training. This does not necessarily mean eating heartily or going to the gym are not important, just that they are not as significant as the key activities.

The law of the few can be also seen in betting, where it is said that with 20% effort you can match the accuracy of 80% of the bettors.

Occupational Health and Safety

Occupational health and safety professionals use the Pareto principle to underline the importance of hazard prioritization. Assuming 20% of the hazards account for 80% of the injuries, and by categorizing hazards, safety professionals can target those 20% of the hazards that cause 80% of the injuries or accidents. Alternatively, if hazards are addressed in random order, a safety professional is more likely to fix one of the 80% of hazards that account only for some fraction of the remaining 20% of injuries.

Aside from ensuring efficient accident prevention practices, the Pareto principle also ensures hazards are addressed in an economical order as the technique ensures the resources used are best used to prevent the most accidents.

https://en.wikipedia.org/wiki/Pareto_principle

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