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 :)

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?

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?

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?

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)

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…

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

InvestAssetWealth

- 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).

DAvid

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