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Pareto principle
The Pareto principle (also known as the 80-20 rule) states that for many events, 80% of the effects comes from 20% of the causes. Business management thinker, Joseph M. Juran, suggested the principle and named it after Italian economist, Vilfredo Pareto. It was Pareto who first noticed that 80% of income in Italy went to 20% of the population. He then carried out surveys of other countries and found to his surprise that a similar distribution applied.
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2. The Pareto principle are appeals to a pseudo-scientific "law of nature". This "law" is usually relied upon to bolster non-quantifiable or non-verifiable assertations that are "painted with a broad brush". The fact that 90/10, 70/30, and 95/5 "rules" exist is sufficient evidence of the non-exactness of the Pareto principle. On the other hand, there is adequate evidence that "clumping" of factors does occur in most phenomena.
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3. The Pareto principle has many applications in quality control. It is the basis for the pareto chart, one of the key tools used in total quality control and six sigma. The Theil index is an entropy measure used to quantify inequities. It is 0 for 50:50 distributions and reaches 1 at a Pareto distribution of 82:18. Higher inequities yield Theil indices above 1.
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4. An 'inverted' application of the Pareto principle is the so-called 'long tail' focus in internet marketing. Rather than focusing on the high-popularity keywords for which there is a great deal of competition, some marketers have concentrated on the much larger number of obscure phrases that each get a few searches per month. Creating web pages that are search-engine-optimized for these is a less challenging task than for the small number of popular and highly competitive key phrases.
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5. One should not be seduced by the symmetry of the idealised case: 80-20 is only a shorthand for the general principle at work. In individual cases, the distribution could just as well be, say, 80-10 or 80-30. There is no need for the two numbers to add up to 100% as they measure different things, eg 'number of customers' vs 'amount spent'). The classic 80-20 distribution occurs when the gradient of the line is -1 when plotted on log-log axes of equal scaling. Pareto rules are not mutually exclusive. Indeed, the 0-0 and 100-100 rules always hold.
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6. Note, however, that sometimes adding up to 100 is indeed meaningful. For example, if 80% of effects come from the top 20% of sources, then the remaining 20% of effects must come from the lower 80% of sources. This is called the "joint ratio", and can be used to measure the degree of imbalance. Thus, a joint ratio of 96:4 is very imbalanced, while 55:45 is just slightly imbalanced.
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7. The Pareto principle is only tangentially related to Pareto efficiency. Vilfredo Pareto developed both concepts in the context of the distribution of income and wealth among the population. more... at Wikipedia
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