The Pareto Principle

At the time, Pareto was studying wealth in various nations. As he was Italian, he began by analyzing the distribution of wealth in Italy. To his surprise, he discovered that approximately 80 percent of the land in Italy was owned by just 20 percent of the people. Similar to the pea pods in his garden, most of the resources were controlled by a minority of the players.

Pareto continued his analysis in other nations and a pattern began to emerge. For instance, after poring through the British income tax records, he noticed that approximately 30 percent of the population in Great Britain earned about 70 percent of the total income.¹

As he continued researching, Pareto found that the numbers were never quite the same, but the trend was remarkably consistent. The majority of rewards always seemed to accrue to a small percentage of people. This idea that a small number of things account for the majority of the results became known as the Pareto Principle or, more commonly, the 80/20 Rule.² 

And the 80/20 Rule is more prevalent now than ever before.

For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships. Furthermore, just two franchises—the Boston Celtics and the Los Angeles Lakers—have won nearly half of all the championships in NBA history. Like Pareto’s pea pods, a few teams account for the majority of the rewards. ³

The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 World Cup tournaments.

Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world’s wealth. In 2015, one search engine, Google, received 64 percent of search queries.^{4 5 6} [-via james clear]

FOOTNOTES

1. These numbers are covered in Pareto’s book, Cours d’économie politique.
2. Pareto published this discovery in 1906 in a book titled, Manual of Political Economy. As I noted here, the 80/20 Rule does not mean the numbers involved must be 80 and 20. It’s just a shorthand way of referring to the idea that the majority of the rewards go to a minority of the players.
3. The Pareto Principle shows up constantly in sports. In the National Football League, the top 19 percent of the franchises have won 57 percent of the Super Bowls. In Major League Baseball, the top 20 percent of the franchises have won 62 percent of World Series championships.
4. Global Wealth Report by Credit Suisse. October 2013.
5. U.S. Desktop Search Engine Rankings by comScore. October 2015.
6. This pattern shows up in negative ways as well. In 2002, Microsoft analyzed their software errors and noticed that “about 20 percent of the bugs cause 80 percent of all errors” and “1 percent of bugs caused half of all errors.” This quote comes from an email sent to enterprise customers by Steve Ballmer on October 2, 2002. The full quote was, “About 20 percent of the bugs causes 80 percent of all errors, and—this is stunning to me—1 percent of bugs caused half of all errors.”