Posts Tagged ‘80/20 rule’

Pareto’s 80/20 rule is ubiquitous

June 11, 2018

I first came across and learned to use the Pareto principle in the 70s as a young engineer. It was the starting point for fault analysis of any kind.  Root cause analysis always started with a “Pareto diagram”. It was an extremely powerful tool not only for fault analysis but also then in all quality improvement actions.

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 causesWikipedia

Pareto showed in 1896 that 80% of land in Italy was owned by 20% of the population and thus was born the 80/20 rule. It has now become almost a cliche in all business processes and in financial and economic analysis to describe the relationship where a minority of causes lead to a majority of the result.

The 80-20 rule is a business rule of thumb that states that 80% of outcomes can be attributed to 20% of all causes for a given event. In business, the 80-20 rule is often used to point out that 80% of a company’s revenue is generated by 20% of its total customers. Therefore, the rule is used to help managers identify and determine which operating factors are most important and should receive the most attention based on an efficient use of resources.Investopedia

The 80/20 rule seems to apply in almost all fields. It applies in wealth distribution, in personal and public finance, in all kinds of manufacturing, in quality control, in experimentation and in disease control.

It is not perhaps so surprising.

Wherever a phenomenon is subject to a power-law probability distribution, the 80/20 rule will apply, and a power-law probability distribution is perhaps the most common form of probability distribution that occurs in nature and in man-made processes. Put differently it is not at all surprising.

Of all the possible causes of an observed effect, a minority of the possible causes are usually responsible for a majority of the observed effect.

Perhaps we should be surprised only if the 80/20 “rule” does not apply. The “20%” and the “80%” should be taken as symbols for a “minority” and a “majority” respectively and then the 80/20 rule is ubiquitous.



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