26 Dec 2010

The Pareto Principle

I admit, I never hear this one before. I was researching something else entirely (relating to Occam’s Razor) when I came across this hereto unknown principle.

It states that, for many events, roughly 80% of the effects come from 20% of the causes and was suggested by business management thinker Joseph M. Juran who named it after Italian economist Vilfredo Pareto.

It was Pareto’s observation that 20% of the population in Italy owned 80% of the land [1906]. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied. He developed the principle having observed that 20% of the pea pods in his garden contained 80% of the peas.

Pareto’s Principle has been observed in wide ranging fields such as economics/business, software design, mathematics, nature etc. For example, 80% of business come from 20% of customers. And Microsoft reported that fixing 20% of reported bugs resulted in 80% of errors and crashes being eliminated.

Fascinating, since like the golden ratio there does not seem to be an explanation, especially when occurring in nature.