Week 8: The 80/20 Rule

Influential Italian economist, Vilfredo Pareto formed The 80/20 Rule after he observed that 80 percent of his peas were produced by only 20 percent of his peapods. His observations are based on the uneven distribution of wealth and theorises that 80 percent of outcomes come from 20 percent of sources. In 1906 Pareto observed that 80 percent of the land in Italy was owned by roughly 20 percent of the population.

In recent times, Pareto’s 80/20 rule has developed into the Murphy’s Law of Management in business contexts. For example, 80 percent of customer service problems are created by 20 percent of consumers.

In it’s many forms, the 80/20 rule describes the same phenomenon: “In most cases four-fifths of our efforts are largely irrelevant.”

Pareto realized at the end of the nineteenth century that there are some quantities in nature and the economy that defy the popular bell curve and instead follow a power law.

Unlike the bell curve, power laws do not have a peak. It is instead a continuously decreasing curve that implies that many small events coexist with few large events.

It is not clear when the term 80/20 rule emerged as Pareto didn’t use it himself, but what is know is that when an 80/20 rule applies a power law will be behind it.