Pareto’s Principle – A Name for an Old Rule
Posted on | August 4, 2010 | No Comments
I have often referred to what I called the 80-20 principle, the common idea that 80% of the results come from 20% of the work. I have set up a portfolio to test the theory called the 80-20 portfolio. Who knew this was an actual economic concept and not just an old wives tale. It turns out this rule was actually developed by an Italian economist named Vilfredo Pareto. Around 1906 Pareto discovered that roughly 80% of the wealth in Italy was owned by 20% of the people. When he turned to other countries, he found that the percentage was roughly the same. The real result is actually a range. Sometimes 90% to 10% in others 70%-30%. But the principle is still valid. There is an important concentration of results to inputs. Most interesting to me is that the Pareto Principle is an example of a power law. I won’t get into Power laws now, but they have appeal in appreacing the concepts of Long tail events. Perhaps I need to rename my 80-20 portfolio to Pareto’s Peanuts.
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