Understanding the Pareto Principle (The 80/20 Rule)

Originally, the Pareto Principle referred to the observation that 80% of Italy's wealth belonged to only 20% of the population. More generally, the Pareto ... LearnRight,NotRote Menu Home Articles Popular Calculus FeedbackContactAboutNewsletter Originally,theParetoPrinciplereferredtotheobservationthat80%ofItaly’swealthbelongedtoonly20%ofthepopulation. Moregenerally,theParetoPrincipleistheobservation(notlaw)thatmostthingsinlifearenotdistributedevenly.Itcanmeanallofthefollowingthings: 20%oftheinputcreates80%oftheresult 20%oftheworkersproduce80%oftheresult 20%ofthecustomerscreate80%oftherevenue 20%ofthebugscause80%ofthecrashes 20%ofthefeaturescause80%oftheusage Andonandon… Butbecarefulwhenusingthisidea!First,there’sacommonmisconceptionthatthenumbers20and80mustaddto100—theydon’t! 20%oftheworkerscouldcreate10%oftheresult.Or50%.Or80%.Or99%,oreven100%.Thinkaboutit—inagroupof100workers,20coulddoalltheworkwhiletheother80goofoff.Inthatcase,20%oftheworkersdid100%ofthework.Rememberthatthe80/20ruleisaroughguideabouttypicaldistributions. Alsorecognizethatthenumbersdon’thavetobe“20%”and“80%”exactly.Thekeypointisthatmostthingsinlife(effort,reward,output)arenotdistributedevenly–somecontributemorethanothers. LifeIsn’tFair Whatdoesitmeanwhenwesay“thingsaren’tdistributedevenly”?Thekeypointisthateachunitofwork(ortime)doesn’tcontributethesameamount. Inaperfectworld,everyemployeewouldcontributethesameamount,everybugwouldbeequallyimportant,everyfeaturewouldbeequallylovedbyusers.Planningwouldbesoeasy. Butthatisn’talwaysthecase: The80/20ruleobservesthatmostthingshaveanunequaldistribution.Outof5things,perhaps1willbe“cool”.Thatcoolthing/idea/personwillresultinmajorityoftheimpactofthegroup(thegreenline).We’dlikelifetobeliketheredline,whereeverypiececontributesequally,butthatdoesn’talwayshappen. Ofcourse,thisratiocanchange.Itcouldbe80/20,90/10,or90/20(remember,thenumbersdon’thavetoaddto100!). Thekeypointisthatmostthingsarenot1/1,whereeachunitof“input”(effort,time,labor)contributesexactlythesameamountofoutput. SoWhyIsThisUseful? TheParetoPrinciplehelpsyourealizethatthemajorityofresultscomefromaminorityofinputs.Knowingthis,if… 20%ofworkerscontribute80%ofresults:Focusonrewardingtheseemployees. 20%ofbugscontribute80%ofcrashes:Focusonfixingthesebugsfirst. 20%ofcustomerscontribute80%ofrevenue:Focusonsatisfyingthesecustomers. Theexamplesgoon.Thepointistorealizethatyoucanoftenfocusyoureffortonthe20%thatmakesadifference,insteadofthe80%thatdoesn’taddmuch. Ineconomicsterms,thereisdiminishingmarginalbenefit.Thisisrelatedtothelawofdiminishingreturns:eachadditionalhourofeffort,eachextraworkerisaddingless“oomph”tothefinalresult.Bytheend,youarespendinglotsoftimeontheminordetails. AFun,Non-MathExample,Please Everythingisniceandrosyintheabstract.Iwanttogiveyouarealexample.TakealookatthisawesomevideoofanartistdrawingacarinMicrosoftPaint.It’sprettyphenomenalwhatcanbeaccomplishedwithsuchabasictool: Nowlet’sdeconstructthisvideo.It’sabout5minuteslong,soeachminuteisabout20%ofthewaytocompletion(ofcoursethevideoisspedup,butweareonlyinterestedinrelativetimesanyway).Takealookathowthecarevolvedovertime: 1:06(Level1)–Wireframe 2:00(Level2)–Basiccoloring 3:05(Level3)–Beginningdetails:rims,windshield 4:04(Level4)–Advanceddetails:shading,reflections 5:05(Level5)–Finishingtouches:headlights,background Now,let’ssaytheartistwascreatingpotentialdesignsforaclient.Given5minutesoftime,hecouldpresent: Asinglecarattopquality(Level5) Areasonablydetailedcar(Level3)andacolorizedwireframe(Level2) 5carsatawireframelevel(5Level1s) “ButLevel5iswaybetterthanLevel1!”someonewillinevitablyshout. Thepointisn’tthatLevel5isbetterthanLevel1—itclearlyis.ThequestioniswhetherasingleLevel5isbetterthanfiveLevel1s,orsomeothercombination. Let’ssayyourcustomerdoesn’tknowwhethertheywantacar,atruck,oraboat,letalonethecolor.SpendingthetimetocreateaLevel5drawingwouldn’tmakesense—showsomeconcepts,getageneraldirection,andthenworkoutthedetails. Thepointistoputintheamountofeffortneededtogetthemostbangforyourbuck—it’susuallyinthefirst20%(or10%,or30%—theexactamountcanvary).Intheplanningstage,itmaybebettertoget5fastprototypesratherthan1polishedproduct. Inthisexample,after1minute(20%ofthetime)wehaveagreatunderstandingofwhatthefinaloutcomewillbe.Mostofthe“work”isdoneupfront,inthesenseofdecidingthetypeofvehicle,bodystyle,andperspective.Therestis“fillingindetails”likecolorsandshading. Thisisn’ttosaythedetailsareeasy—they’renot—buteachdetaildoesnotaddasmuchtothepictureasthebroadstrokesinthebeginning.Thedifferencebetween#4and#5isnotasgreatas#1and#2,orbetteryet,ablankdrawingand#1(thetimefrom0:00to1:06).Youreallyhavetolooktoseethedifferencesonthecarbetween#4and#5,whilethecontribution#1makesisquiteobvious. ConcludingThoughts Thismaynotbethebeststrategyineverycase.ThepointoftheParetoprincipleistorecognizethatmostthingsinlifearenotdistributedevenly.Makedecisionsonallocatingtime,resourcesandeffortbasedonthis: Insteadofspending1hourdraftingapaper/blogpostyou’renotsureisneeded,spend10minutesthinkingofideas.Thenspend50minuteswritingaboutthebestone. Insteadofagonizing3hoursonasingledesign,make6layouts(30minuteseach)andpickyourfavorite. Ratherthanspending3hourstoread3articlesindepth,spend5minutesglancingthrough12articles(1hour)andthenspendanhoureachonthetwobestones(2hours). Thesetechniquesmayormaynotmakesense–thepointistorealizeyouhavetheoptiontofocusontheimportant20%. Lastly,don’tthinktheParetoPrinciplemeansonlydo80%oftheworkneeded.Itmaybetruethat80%ofabridgeisbuiltinthefirst20%ofthetime,butyoustillneedtherestofthebridgeinorderforittowork.Itmaybetruethat80%oftheMonaLisawaspaintedinthefirst20%ofthetime,butitwouldn’tbethemasterpieceitiswithoutallthedetails.TheParetoPrincipleisanobservation,notalawofnature. Whenyouareseekingtopquality,youneedall100%.Whenyouaretryingtooptimizeyourbangforthebuck,focusingonthecritical20%isatime-saver.Seewhatactivitiesgeneratethemostresultsandgivethemyourappropriateattention. OtherPostsInThisSeries TheRuleof72 UnderstandingAccountingBasics(ALOEandBalanceSheets) UnderstandingDebt,RiskandLeverage WhatYouShouldKnowAboutTheStockMarket UnderstandingtheParetoPrinciple(The80/20Rule) CombiningSimplicityandComplexity Observations Join450kMonthlyReaders Enjoythearticle?There'splentymoretohelpyoubuildalasting,intuitiveunderstandingofmath.Join thenewsletterforbonuscontentandthelatestupdates. 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