Money Matters: The Pareto Principle

In this edition of Money Matters, we are going to talk about a principle that not only deals with finance but in most aspects of life. This is called the "Pareto Principle."



A brief history of the Pareto Principle:

"In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. In the late 1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto's Principle...

...As a result, Dr. Juran's observation of the "vital few and trivial many", the principle that 20 percent of something always are responsible for 80 percent of the results, became known as Pareto's Principle or the 80/20 Rule."

Source here.

Some use the 80/20 rule, others modify it to make it 90/10. Whatever your ratio is, the principle stays the same.

In order to fully understand the Pareto Principle, let us apply it to some of the occurrences in our everyday lives. Here are some examples (I am going to use 80/20):

Use this wisely.
Image credits here.

• 20% of the rich population owns 80% of the money. In reverse, 80% of the population gets the remaining 20% (which somehow explains poverty).
• 80% of your sales comes from the 20% "hot" contacts you have.
• 80% of what you do everyday is really not that important; only 20% does. (To validate, get the number of hours you're awake, then take the hours that you use in doing "meaningful" work. Do not cheat on this one. Even the best slack off at times during work hours).
• 20% of the correct analysis solves 80% of problems.
• 80% of what we wear comes from 20% of the clothes in our closet (you usually wear your "favorite" clothes).
• ...and a whole lot more, think of the things that the principle applies to. 

PP imparts 2 important traits - FOCUS and PRIORITIZE. Focus on the things that matter, the 20%. Although this is nowhere near to being a perfect principle, this is a good reminder to us to not just work hard, but to work smart...and not just to work smart but work smart the right way. Use it wisely and with discretion, and it may give you a lot of benefits in the long run.



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