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First Principles

What is the Pareto Principle?

 , updated on March 05, 2023
The Pareto principle, also known as the 80–20 rule, is a common distribution seen in business and economics that predicts that 80 percent of effects come from 20 percent of causes. This is based on the work of Italian economist Vilfredo Pareto who observed that 80% of the land in Italy was owned by 20% of the people in 1906.
The principle gained popularity because this ratio shows up in a wide range of both natural and human phenomena. For example, a business that obtains 80 percent of its profits from 20 percent of its customers. Practically every industry and profession has made some use of the Pareto principle to fit observed data and to shape strategy, design and decision making.
Overview: Pareto Principle
Type
Definition
The rule of thumb that 80 percent of effects come from 20 percent of causes.
Value
The Pareto Principle is often used to prioritize actions that will have the greatest effects.
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