Pareto Principle

80% of the outcomes come from 20% of the action.

Scenario 1: What if 20 percent of your strategic plays within your basketball team can earn you 80% of your game winning points during a close game?

Scenario 2: You start a new job in client relationship (sales) and your performance is tied to your results. What would you do? Wouldn’t you show loyalty to top 20% of clients who will generate 80% of earnings?

Scenario 3: Most coursework require an average amount of effort and then there is this one course that requires more work than all the other courses combined for that semester but impacts your GPA the least.

What Is Pareto Principle (80/20)?

For many events, it can be shown that 80% of the effects come from 20% of the causes. Inputs are not directly relational to outputs. In business, 80% of revenue generally comes from 20% of the clients. This principle can help to show where to focus time and energy.

History

The Pareto Principle was founded by Vilfredo Damaso Pareto, an Italian economist in 1896. Pareto, an amateur gardener, noticed one day that 20% of the pea plants generated 80% of the healthy pea pods. This observation led him to think about uneven distribution. He observed this same principle elsewhere. For example, he also realized in Italy where he lived, 80% of the land was owned by 20% of the people. He further investigated different industries and found that 80% of production typically came from 20% of the companies. This generalization became the Pareto Principle.

Deep Analysis

The Pareto Principle also known as the 80/20 is an incredible helpful mental model to add it to our toolbox. In a world where you are constantly bombarded with information, the Pareto Principle can help you make the right choices by shifting our focus and energy on tasks that would produce the most results.

Itʼs important to remember that there are only so many minutes in an hour, hours in a day, and days in a week. Pareto can help you see that this is a good thing; otherwise, you’d be a slave to a never-ending list of things to do. So, you must always ask — what 20% of your work can drive 80 % of the outcomes?

Before we dig deeper any further, let’s clarify the limitations of the Pareto Principle.

Limitations of Pareto Principle — while the 80/20 split is true for Pareto’s observation, that doesn’t necessarily mean that it always has to equal 100. For instance, 30 percent of employees (30 out of 100) can complete 60 percent of the total tasks. The remaining employees may not be as productive or may be slacking off on the job. This further reiterates that the Pareto Principle is merely an observation and not necessarily a law.

With any mental model, it is important not to over apply it. The biggest takeaway the Pareto principle provides is the idea that most things in life are not distributed evenly. While you should be seeking to invest your time in the highest output activities, the fact remains that for many things, you canʼt just do 20% of the work for 80% of the result. Sometimes you need to grind out the last 20% — even if you are suffering diminishing returns — to get the job done. Building 80% of a car isnʼt the best strategy, nor is completing 80% of your research paper.

Apply Inversion in addition to Pareto Principle for improvement and growth. Managers should not focus on the 20 percent of top performers on their team at the expense of the other 80 percent. Managers are responsible for increasing the number of top performers, not just assessing and potentially eliminating those who are poor performers. Investors might think the 80/20 rule suggests reducing their investment diversification, i.e., 20 percent of their investments are driving 80 percent of the results but pay careful attention to an overall portfolio mix because not diversifying can lead to significant losses.

Paretoʼs principle is a useful construct when analyzing efforts and outcomes. It can provide a useful framework for addressing many problems. It should be used liberally, but you should not forget that 20 percent is a general observation.

Mark Cuban uses Pareto Principle who is one of the immensely successful businessman and investor on Shark Tank deals.

“Out of the 71, I would say ten or 11 are netting a minimum of half-a-million dollars a year, doing $8 million to $15 or in some cases, $20-plus million revenue. I would say about 30 percent of my companies have returned all of my investment and then some. To me, the more important thing is the ʼ80/20 Rule.ʼ So if I have the 20 percent that I think can really take off, thatʼs what I really care about.” Eat the biggest frog first — the most valuable tasks one can do each day are often the hardest and most complex, but the payoff and rewards for completing them can be tremendous. Before you begin work, you should always ask yourself, “Is this task in the top 20 percent of your activities or in the bottom 80 percent?” The rule for this is — resist the temptation to clear up small things first. If you choose to start your day working on low-value tasks, you will soon develop the habit of always starting and working on low-value tasks. You should continue to work at those goals that you have chosen as the most valuable all the time. You should always work towards your main goal! Pick one big goal and work on it all the time, and if you do, it can change your life.

Applying Pareto Principle to know your competencies — competence means that you begin to become very, very good in the key areas of your chosen field. You apply the 80/20 rule to everything you do and you focus on becoming outstanding in the 20 percent of tasks that contribute to 80 percent of your results. You dedicate yourself to continuous learning. You never stop growing. You realize that excellence is a moving vehicle which never stops spinning. And you commit yourself to doing something every day that enables you to become better and better at doing the most important things in your field.

Applications

Because of the versatility of this mental model, there are many ways to apply Pareto Principle in our lives.

  • Retirement — one way to give your retirement planning a boost is to take actions that drive the greatest financial results. For example, contributing and maxing out on 401k forces you to secure your retirement income. Future retirees can contribute 10% of their income annually for 30 years to fund most of their retirement.
  • Project Managers — are faced with the constant challenge of limited resources. Use Pareto Principle approach to truly understand which projects are most important. What are the most important goals of your organization, or boss, and which specific tasks do you need to focus on to align with those goals? Delegate those important goals and drop the rest.
  • Business, Freelancers & Entrepreneurs — itʼs important to identify your best and highest-paying clients. Of course, you donʼt want all your eggs in one basket. But too much diversification will quickly lead to burnout. Focus on the money makers and strengthening those long-term relationships. Entrepreneurs and independent professionals can use the 80/20 rule to evaluate their workloads. They might find that a disproportionate amount of their time is spent on trivial activities such as administrative work that can be easily and inexpensively outsourced. Focus on 20% of the critical tasks that are driving the most results.
  • Business — approximately 20% of the sales force is likely to produce 80% of the companyʼs revenues. This generalization can be expanded to all segments on business such as human resource, finance, sales, business relationships and quality assurance. If applied efficiently, business can operate like a well oiled engine.
  • Design — if the critical 20 percent of a product’s features are used 80 percent of the time, design and testing resources should focus primarily on those features. The remaining 80 percent of the features should be reevaluated to verify their value in the design.
  • Social Life — to create deep and meaningful relationships, spend 80% of your time with the same 20% of your friends and family members.
  • Athletes — for them, handling every possible skill that gets thrown their way, is impossible. So they use Pareto to help them determine what is of vital importance and then spend their energy improving that particular skillset. If a basketball player can improve her 3 pointer range and stats, this player would be of immense help during the game tying opportunities.
  • On Quality — applying the 80/20 rule to quality studies. The 20 percent of the defects cause 80 percent of the problems in most products.
  • Health — a common strategy to become healthy is to approach the problem with the Pareto principle in mind, you might ask yourself, “What is the lowest effort exercise or movement I can perform that will provide the most health benefits?” Simply do that low effort exercise that will contribute towards the most healthy lifestyle.
  • Schoolwork — 30% of school courses require 70% of the effort but impacts your GPA the least. Focus on studying for courseworks that would contribute the most towards your GPA first, then address the low hanging fruit.
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