What is the 80:20 Rule?

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80 20 Rule

The “80:20 Rule” refers to the idea that the majority of any outcome is determined by the most significant minority.  The rule posits that 80% of any given outcome is determined by only 20% of the causes.  This rule can be applied to many different contexts; and it has found thousands of applications in the world of economics, business, culture, and society.  Simply put, the 80:20 Rule holds that in any situation where there is a wide selection of factors in play, only a few of these factors are the most important for consideration.

History of the 80:20 Rule

The 80:20 Rule was developed by an Italian economist, Vilfredo Perato, upon observing that 80% of the land in Italy was owned by just 20% of the population.  As he gathered more evidence on this trend, he found that it applied to the wider world.  Known by some as the “Perato Principle,” the idea began to gain popularity and relevance in an increasing number of real-world contexts.

Common Applications of the 80:20 Rule

The most commonly cited application of the 80:20 Rule is within the realm of business management.  No matter the subject of your calculations, the answer will almost always point to a significant minority causing most of the observed results.  For example, about 80% of a business’s revenue (income) is typically generated by only about 20% of its clients or vendors.  Or, about 80% of a business’s production is typically generated by only about 20% of its most valuable employees.  Ultimately, by focusing on the “vital few” factors (as Perato referred to them), the cause of most outcomes can be more easily determined.

Once this basic principle is understood, there are a host of applications for which the 80:20 Rule can be employed as a valuable metric.  If, for example, you want to reduce problems in work production, identify the biggest problems and tackle those first.  When deciding how to budget your month, determine which expenses demand the largest chunk of your money.  Even in your social life, spending 80% of your time with 20% of your friends can maximize the efficiency of your social interactions.