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The 80/20 Rule and How it Applies to You





As I’ve been doing a lot of reading lately, I came across a principle that can have a profound impact on productivity if applied properly.  The principle is called the 80/20 rule (Pareto Principle).  There is a pattern in the world that occurs over and over again where 80% (the majority) of the results come from 20% (or less) of the causes.

Here are some examples from the book Living the 80/20 Way:

  • 80% of your enjoyment in life is from 20% of the time
  • 80% of your relationship fulfillment is from 20% of your friends.
  • Far less than 20% of the Earth’s surface produces 80% of its mineral wealth.
  • More than 80% of the food comes from less than 20% of the land.
  • More than 80% of the worlds wealth is held by less than 20% of the population.

This can apply to personal finance and investing in many ways:

  • If this principle holds true, it means that 80% of your investment returns come from about 20% (or less) of your portfolio.
  • 80% of your business income, comes from approximately 20% of the revenue sources.
  • 80% of your productivity at work comes from about 20% of your time (so true).
  • 80% of the company productivity comes from 20% of the employees.
  • 80% of your savings come from 20% of your frugal strategies.
  • 80% of your family income is derived from 20% of the income sources.

Or even how it applies to this blog:

  • 80% of the traffic is generated from 20% of the articles
  • 80% of the comments are from 20% of the readers

If you apply this to your own life, you’ll realize that a relatively small amount of effort brings the majority of the results.  If you focus on the tasks (20%) that bring the most success (80%), then you’ll increase your overall productivity and reduce time wasted.

In other words: Less is More

The focus now is to exploit this rule and work on the 20% that brings the most results.  With that said, I’m off to write more articles.

Do you use the 80/20 productivity rule?





22 Comments, Comment or Ping

  1. I love the 80/20 principle. Thanks for the reminder on how to focus on what is truly important!

  2. 2. Philip in North York

    Pareto Principal… That’s what I learned from quality control course in the college. If I remember correct, it was to find out what are the significant causes for a result. However, I aware of that rule from my part time job before.
    In my case:
    80% of revenue is generated in 20% of my work hour
    (it has never been wrong)

    80% of homework is done in 20% of free time
    (usually the day before the due date…..)

    I have a different opinion about focusing the decisive tasks to achieve the best result. I think the non-productive (80%) time is important as productive (20%) time. We need time to setup to be productive, to rest for tomorrow, and to help each other while we are working. A stellar work or performance is impossible without strong supports or ground works.

  3. I completely agree with this “80% of the traffic is generated from 20% of the articles”

    As for stock investing, 80% of your dividend income would come from 20% of the stocks in 2 decades..

  4. 4. steve d

    I would recommend reading “The Long Tail” which looks at this same principal in a completely different light. The perspective it offers is there is business opportunity if you can figure out how to market that 80%, especially if everyone else is focusing on the 20%.

  5. 5. DAvid

    I’d be cautious about stretching this “rule”. About 10% of the land surface of the world is arable, 3% of the world’s water is fresh, and less is potable. Examples abound of contradictions to this particular ‘rule of thumb’, including parallels, such as ‘the last 10% takes 90% of the effort’.

    DAvid

  6. 6. Scott

    This rule is creepily accurate — for some applications. Certain arenas I don’t think apply. Such as ones FT posted:

    - 80% of your investment returns come from about 20% (or less) of your portfolio.
    *then why not sell the unproductive 80% and re-invest in the return-positive 20%? Making your portfolio 100/100!*

    - 80% of the company productivity comes from 20% of the employees.
    *again, can the slacker 80%, keep the other 20%; at the same time cutting overhead and increasing profit even more!*

    - 80% of your family income is derived from 20% of the income sources.
    *this one simply does not make sense. 100% of my family income is derived from 100% of the income sources.*

    I think, as in statistics, you need the right combo of inputs for this application to work properly. As well, as Philip pointed out, there may be a lot more behind the 20% supporting the other 80%. Take farming for instance. Pretty much every aspect of farming HAS to be undertaken or else there will be no product — tilling, sowing, watering, pest control, harvesting, et al. Again, this would be an example of 100:100%, equal (or greater) cause to obtain equal results.

    @steve d: “The Long Tail” sounds like contrarianism (eg. buy when others are selling). Focus on what your competition is NOT doing rather than what is IS doing (and trying to copy it, resulting in predictable, and already established, results).

  7. Scott, yes you are right about the family income sources, it doesn’t make much sense. :) What I meant to say, and I was thinking of our situation when I wrote it, was that 80% of your total income is from 20% of your income streams. We have multiple streams of income, and it’s true that the bulk of our income comes from a small percentage of the income streams.

  8. The notion that most of the effect comes from a small percentage of the cause definitely holds true in some aspects of life. Whether it is 80/20 or 70/30 or 91/9 etc. its hard to say and changes for different events. What I find most interesting is how you spend and manage your time. As FrugalTrader suggested in his conclusion, if you can identify what produces results, you can allocate your time accordingly. In the business world, everyone has the same 24 hours / day to work with. How you manage and leverage your time is vitally important to your success and happiness.

    InvestAssetWealth

  9. 9. Kirk S.

    I think some people are missing the point of the Pareto principle…it is meant to allow you to optimize your resources (time, money, investments, work time, etc.), so that if you realize that 80% of the work gets done by 20% of the workers, that you SHOULD fire the other 80%. Similarly, if only 20% of your investments are successful, you should optimize this. Obviously this doesn’t work in all situations, but it is meant to have you think about optimization.

  10. 10. Dana

    I like the rule a lot and it makes perfect sense. But I’ve always been puzzled as to what happens once you optimize according to the rules. So you get rid of the 20%, then what? Can you optimize even further and cut out more fat?

  11. 11. Sarlock

    Within this ratio is a very powerful item to focus your energy on. If you can raise that 20/80 split to 25/75 or even 30/70, especially with regards to productivity, you can experience some very significant compound results over a period of years. Being 30/70 productive compared to 20/80 productive gives you a 50% productivity edge and over a period of 10 or 20 years, this can have incredible compounding effects (compare Toyota and GM for a great example of this). This applies both to individuals and businesses as a whole.

  12. 12. Brandon

    We’ve been using this rule for many years at my work to reduce the number of IT tickets we receive. We basically categorize all the tickets in a month and look at the top 20% and figure out ways to eliminate the issue… and the top issue is always people forgetting their windows password :)

  13. Hello,

    I have heard about this principle for long time, but not really pay much attention. Now, after dealing with overload tasks, i am trying to implement it by list down my daily tasks, choose the 3 to 5 tasks that give 80% result, then delegate others. I used to be perfectionist before and did all the things myself, but if I want to live better and feel good, I realized I need to change.

    I implement 80/20 for my business as well, increase my sales by using some leverages.
    Focus on the employee which give 80% results, and cut off for the rest.

    For investment, we may focus on that give 80% profit, but for the rest 20% profit, we may not just cut off.
    Can not put all the eggs on one basket. I ever did this before, i had made a mistake

  14. 14. Mark

    When I became a business consultant, this rule became my bread & butter; when you’re able to help clients focus on this “business behaviour”, if I can use the term, then you somewhat become a “godsend” as a problem fixer!

    I think though that we need to be careful in assuming this 80/20 rule; it isn’t rocket science but it isn’t the whole science as well…. For some areas, it will be easy to see & adapt results accordingly while in other areas, it may be a little trickier…

  15. 15. Scott

    It would be interesting to see if this applies to the markets: 80% of movement (of significant measurability) happens in only 20% of the time frame — ie. in 10 years a market will rise, consolidate, fall, rise, consolidate, rise, consolidate, etc, etc. Just pondering…

  16. 16. TMOD

    Hi Dana,

    I’ve had the same question in my mind as well – what happens when you’ve eliminated 80% of the effects by acting on 20% of the causes?

    If you’re talking about the kind of small sets of cause/effect data that we might encounter in our personal lives, then once you’ve acted on the 20% once, the 80/20 relationship may no longer hold. But if you have a very large data set, for example book sales on Amazon, you’ll find that you can remove the top 80% of effects many times before the relationship breaks down.

    That brings up another interesting question. Say you look at all of the sales of books on Amazon but you’re not really interested in the bottom 80% of books. You make a Best Sellers list that only shows the top 20% of books which contribute roughly 80% of overall sales.

    Now you want to make an Ultra Best Sellers list. You get rid of the bottom 80% of the Best Sellers list. Does the Ultra Best Sellers list still account for 80% of the sales in the Best Sellers list?

    It sure does! But what does that mean?

    The books on your ULTRA-Best-Sellers list now represent only 20% of 20% of the books sold on Amazon (i.e 4%) – and account for 80% of 80% of total sales (i.e.64%).

    And voila! You’ve just discovered the 64/4 rule stating that 64% of your effects come from just 4% of causes.

    (Note that there’s no reason the that 80/20 or 64/4 need to add up 100. If we think about it, why would they? 80% are apples and 20% are oranges. Look here for an explanation. http://en.wikipedia.org/wiki/80/20_rule#Mathematical_notes)

  17. 17. vilkri

    Kirk S. reflects the tone of the post by saying, “I think some people are missing the point of the Pareto principle…”. I could not agree more, but his reasoning is wrong. Say 80% of your portfolio return comes from 20% of your holdings. Some suggest you could optimize your portfolio. The only trouble is that you don’t know in advance what 20% of your holdings will contribute 80% of your return. You kind of need to also invest in the “waste”.

  18. 18. cannon_fodder

    Our company is looking at a 70/20/10 rule. 20% of the people should be “encouraged” to leave, 70% are the average employees, and 10% are the stars that should be supported and mentored.

    I also remember reading an article about managing a salesforce. Most employers end up spending extra time on the poor performers to bring them up to an acceptable level. This gentleman suggested focusing that energy on the star performers as a more effective way to produce results. Sound familiar?

  19. 19. zudora

    i wonder if this rule can be applied to housing. currently looking to buy a home and most likely have to sacrifice space to get the location i want. do we spend 80% of our time in 20% of our homes?

    if i am being swayed by the larger homes outside my target location, will i end up buying alot of space that will be wasted or not used efficiently? is it better to have a smaller home, and use it efficiently?

  20. i suggest you read “the black swan”

    objective data shows that ‘pareto’s law’ is not 80/20. it’s much closer to 99.95/.05

    this has massive implications for investing in the stock market. or did everybody already lose half their money and figure it out?

  21. 21. Scott

    I too would highly suggest “The Black Swan”.

  22. Combine 80/20 rule and Parkinson’s Law.. and you’ve essentially supercharged your productivity.. :)

    I learned of the Pareto’s Principle in a Business Statistics course.. but was refreshed of the two laws from the Four Hour Workweek.. highly recommended of course :)

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