Vilfredo Pareto was a wily and controversial economist-cum-sociologist who lived from 1848 to 1923. An engineer by training, he started his varied career managing coal mines and later succeeded Leon Walras as the chair of political economy at the University of Lausanne in Switzerland. His seminal work included a then little-explored "law" of income distribution that would later bear his name: "Pareto's Law", or the "Pareto Distribution", also popularly called the "80/20 Principle".
The mathematical formula he used to demonstrate a grossly uneven but predictable distribution of wealth in society — 80% of the wealth and income was produced and possessed by 20% of the population — also applied outside of economics. Indeed, it could be found almost everywhere.
Pareto's Law can be summarized as follows: 80% of the outputs result from 20% of the inputs. Alternative ways to phrase this, depending on the context:
- 80% of consequences flow from 20% of the causes
- 80% of the results come from 20% of the effort and time
- 80% of company profits come from 20% of the products and customers
- 80% of all stock markets are realized by 20% of the investors and 20% of an individual portfolio.
The list is infinitely long and diverse, and the ratio is often skewed even more severely: 90/10, 95/5, and 99/1 are not uncommon, but the minimum ratio to seek is 80/20.
Source: The 4 hours work week book
