80/20 - Pareto Principle and the Power Law Distribution

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From Wikipedia:

What is the Pareto Principle (80–20 rule, the law of the vital few, and the principle of factor sparsity)

• Definition: For many events, 80% of the effects come from 20% of the causes.
• Who thought of it?
  • Business management Consultant Joseph M. Juran named it after Italian economist Vilfredo Pareto
• Examples: Application and Relevance
  • Business:
    • 80% of a company's profits come from 20% of its customers
    • 80% of a company's complaints come from 20% of its customers
    • 80% of a company's profits come from 20% of the time its staff spend
    • 80% of a company's sales come from 20% of its products
    • 80% of a company's sales are made by 20% of its sales staff
  • Maths: Power Law Distributio
  • Maths: Pareto Efficiency
  • Economics: Distribution of Income and Wealth amongst the Population
  • Software Engineering: Microsoft: by fixing Top 20% of reported bugs, 80% of errors and crashes would be eliminated
  • Occupational Health and Safety: 20% of the hazzards will account for 80% of the injuries; If a safety professional addresses hazards in random order, then he is more likely to address one of the 80% hazards that account 20% of injuries
  • Systems Science: SugarScape (An Agent-based simulation model) base on individual behaviour rules for each agent in the economu ,wealth distribution and 80/20 principle becames emergent.
  • Quality Control: Basis of Pareto Chart (Key tool in total quality control and six sigma).
  • Logistics and Procurement: Used as baseline for ABC-Analysis and XYZ analysis to optimize stock of goods and costs of keeping and repleninshing that stock.
  • Health Care in US: 20% of patients use 80% of health care resources
  • Criminology: 80% of crimes committed by 20% of criminals.
  • Power Politics by Colin Wilson: Based on study of rats in croded environments and communist management of US POWs in Korean War)20% of humans are 'power men' suited to governing and exploiting the other 80% of humanity
  • Financial Services Industry: Profit risk: 20% of company's customers are generating positive income while 80% costing the company money
  • Equality Measure: Used together with the Gini Coefficient and Hoover Index, as well as the Theil Index
• Misconceptions
  • 80/20 is a description from the data in a system, not a solution to a problem that fits the 80/20 figure
  • Should not be used for data with small number of categories or observations
• Similar Ideas
  • Champagne Glass Effect
  • Gaussian Relationship
• Proof
  • 1906 Vilfredo Pareto's Observation (Italian economist)
    • 80% of the land in Italy was owned by 20% of the population
    • 20% of the pea pods in his garden contained 80% of the peas
  • 1992 United Nations Development Program Report: distribution of global income as richest 20% of the world's population controlling 82.7% of the world's income

From TED Presentation: