What is a Pareto Principle?

The Pareto principle is a concept used frequently in economics and business to improve productivity and make better decisions. The basic idea is that approximately 80% of any outcome is based on about 20% of the work, effort, or resources used to create it. This is used as a general rule of thumb, and it isn’t expected to match reality exactly. An example would be the idea that 20% of an individual’s work is responsible for about 80% of his productivity during a given day. The Pareto principle is used in a wide variety of contexts, from managing businesses to making predictions about economic outcomes.

The idea for the principle came from a famous economist born in the 1800s named Vilfredo Pareto. He made a famous comment that about 20% of the people in Italy were owners of about 80% of the land. This fact helped a man named Joseph M. Juran come up with the actual principle. He didn’t name it "the Pareto principle," but that name developed a certain amount of popularity, and it eventually became predominant. Juran saw the principle as primarily a management strategy and a universal concept that could be applied to many fields.

Some experts stress that the Pareto principle isn’t a hard and fast rule. It’s considered more of a reliable assumption, and in many situations, it won’t necessarily apply exactly. For example, a person may assume that 20% of his company's products are likely to produce 80% of his profit, and things will probably work out that way, but any given company may see the results skewed in a totally different way, such as 90% from 20% or 40% from 50%. It’s also not important that the two numbers add up to an even 100%.

People often use the Pareto principle to make important decisions about how to use their time. The idea is that if a person can focus most of his time on the tasks that create 80% of his results, he will have a much more successful and productive outcome. An example would be a business manager choosing to give the vast majority of the company's bonus money to the 20% of employees that make the biggest contribution to success. Many business managers choose to apply the Pareto principle as a way to improve the efficiency of a business, but if it’s applied incorrectly, negative outcomes are generally a big possibility.