Pareto's Law

The Idea

Contributed by @philhagspiel |  Edited and curated by @philhagspiel

Very few inputs often create a large part of the result.

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Logic & Reasoning

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Mental Models

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The 80/20 principle is famous. It says that 20% of something accounts for 80% of something else.

Most famously, it was formulated by economist and engineer Vilfredo Pareto to describe how 20% of inputs or effort often account for 80% of outputs or results — the Pareto Principle.

More generally, the 80/20 principle has been empirically shown to apply roughly to a wide range of human-made systems as well as natural phenomena:

  • 80% of a country's population live in 20% of its cities
  • 80% of customer complaints come come 20% of the customers
  • 80% of productive work is done in 20% of the time
  • 80% of website traffic comes from 20% of content
  • 80% of sports game wins are decided by 20% of the players
  • 80% of a countries wealth is held by 20% of its population
  • 80% of revenue in an economy is generated by 20% of companies
  • 80% of sold books are written by 20% of all authors
  • ...

The 80/20 rule is a specific version of a broader phenomenon: Power Law Distributions.

Non-technically speaking, power laws describe very unequal distributions — in stark contrast to the normal distribution often taught in basic statistics (i.e. the distribution of people's height). If a power law is at work, a few radically dominate all others.

Power laws can especially be observed whenever resource allocation is at play: money, ideas, inventions, space, etc. In statistics, complexity and systems theory, researchers are still trying to understand what the core dynamics behind power laws are. Compounding effects play a large role. Moreover, it seems that dynamics often funnel more to entities that already have a lot and further take away from those who don't.

This idea was already understood millennia ago. In the Bible, the so-called Mathew Principle (Matthew 25:29) states:

“For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.”

The Pareto Principle in particular and power laws in general are omnipresent in everyday life on a personal, societal and economic level. Understanding the power and effect they have is crucial for decision making.

Go Deep

  • For an overview of how compound effects, exponential growth, power laws and the 80/20 principle come together and how they are relevant in modern world, read this Farnam Street blog post.
  • For a refresher on compounding and the power of exponential growth, check out this previous MindVault idea.
  • For an interesting take on how the Pareto distribution is at play in economic terms, watch this video from a Jordan Peterson lecture.

Go Beyond

A few further resources you might like if you find above idea interesting: