Pareto principle

In my previous post, I wrote about accumulated marginal benefit – how small things do count when there are enough of them. However, it would be negligent of me to not write of the polar opposite: the Pareto principle.

Pareto explained

While originally named after an Italian economist, the principle goes by many alternative names. The 80-20 rule is perhaps the most descriptive, whereas hockeystick curve usually refers to an illustration of the same phenomenon.

No, that’s an actual hockey stick there.

My bad. I’ll show you the correct one in a few seconds.

But before that: the explanation

By whichever name you refer to the principle, its core remains the same: 80 % of effects are due to 20 % of causes. Or vice versa – a huge majority of actions cause a relatively small part of the reaction.

Or let’s formulate it in even more general terms: 20 % of this relates to 80 % of that.

Indeed, the figure below shows the ordered popularity ranking of something – might be websites, might be actors. The few ones on the left – the famous 20 % – get the majority of all fandom. Makes sense really. Think of how many actors you can name, and compare that to the number of actors in the world, or even your country. Point proven.

Of course, the rule is only approximate (very much so) and non-universal.You cannot just blindly apply it to everything.

But, it does seem to hold true in wildly different fields.

And by identifying those instances – by acknowledging and understanding when you should be looking for that 20 % culprit – you can plan your actions accordingly.

Where the principle holds

The earliest example of the principle was by nobody else but Mr. Pareto himself, who showed that 20 % of Italians owned over 80 % of the land, in the late 19th century. Sadly, the distribution of wealth does not seem to be at all closer to uniform today. Other examples include, for example, the consumption of alcohol on population level (90 % consumed by 10 % of people), and 80 % of business revenue generated by 20 % of customers.

For us electrical engineers, another kind of example might be in order. Hence, let’s consider the magnetization of magnetic steel – the kind most electrical machines are made from. As we all know, it’s quite easy indeed to go from 0 to something like 1.3 Tesla in a closed magnetic circuit. Just apply a little current and there we are. That’s the 20 of effort, with the 80 of effect. After that, the iron starts to saturate, and going to 1.7 T is going to require a significantly larger current – the 80% effort yielding only the 20% of the final increase in flux density.

But you don’t have to only look at large entities – or physical phenomena – to see Mr. Pareto’s brainchild in action. On the contrary, you can easily apply the same principle on a personal level as well.

Pareto principle for you

For example, looking at your expenses, most of your money will probably go to housing-related costs – be it rent or mortgage. Likewise, if you want to lose some body fat, your success will be very largely determined by your energy intake. Finally, your daily energy levels will depend on the number of hours you slept the previous night, more than anything else.

So, it is easy to see how you can apply this rule to your personal benefit. No matter what your goal is, the largest contributors to your success are often quite easy to identify. And once you have, tackling them should be your foremost goal, as they will give you the largest bang for your buck.

Fix the largest contributor, and the results will be satisfactory most of the time.

Set the foundation, and you are well on your way to building your house (or bridge).

The same principle can also be applied in reverse; when cutting stuff away instead of adding some new. Let’s say you have some kind of artisan soap business, or whatever. You are making a nice profit, but are feeling a bit run down and would like to decrease your hours a bit. Taking a quick look on your books, you can identify the craziest soap aficionados among your customers, who are buying most of your products. By only serving them in the future, you can reduce your workload quite a bit.

Efficiency versus excellence

But unfortunately, your income will of course come down by 20 % or so. And on a wider scale, that’s the main reason against going totally Pareto-crazy. Indeed, it’s all about efficiency, getting a reasonably high output with a relatively low input.

By contrast, when excellence – getting the best possible outcome – is you goal, 80 percent of maximum is nowhere nearly sufficient. It can get you started and give you a nice head start relatively easily, but it won’t make you win the race. For that, the remaining 20 percent will be needed.

80 % of what?

Furthermore, the 80-20 distribution may also depend on the cost function you are using. For instance, your day job is probably the largest single time-sink in your life, and may also be a major contributor to your stress level. However, it’s probably also the main source of your monetary income, so cutting down on it may not be all that feasible.

In such cases, it’s often a good idea to apply some constraints – like identifying time-consuming activities that don’t produce much income or happiness – and then eliminate the worst malefactor among them. Often, TV will get the noose.

But now, this post itself is well beyond its Pareto front: it has barely improved in the last ten minutes I’ve been “writing” it. I’ve expended my 20 %, and the post has achieved the famous 80 % – it’s okay.

Update: since I feel this post represents such a central topic to my overall life philosophy, this is now the third or fourth time I’m editing it. I’m not satisfied with efficiency any more – I demand excellence. But, the topic of this post absolutely demands me to state this: the core contents have not changed a bit. It’s only been a little formatting here, an extra paragraph there. Lot’s of time spent of final polishing. But, once the foundation is in place, also those actions do count – as I’ve also written about here and here.

So – until next time!

-Antti

Pareto principle