80-20 Rule

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DEFINITION of '80-20 Rule'

A rule of thumb that states that 80% of outcomes can be attributed to 20% of the causes for a given event. In business, the 80-20 rule is used to help managers identify problems and determine which operating factors are most important and should receive the most attention based on an efficient use of resources. Resources should be allocated to addressing the input factors have the most effect on a company's final results.

Also known as the "Pareto principle", the "principle of factor sparsity" and the "law of the vital few."

INVESTOPEDIA EXPLAINS '80-20 Rule'

The 80-20 rule was developed by Joseph Juran, a 20th century figure in the study of management techniques and principles. The 80-20 rule has been applied to a number of different facets of business.

An example of the 80-20 rule in economics would be that 80% of a country's wealth is controlled by 20% of the population, although this can be explained by the Gini index.

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RELATED FAQS
  1. How historically valid is the 80-20 rule?

    While there is a lack of scientifically stringent statistical analysis either proving or disproving the validity of the 8 ... Read Full Answer >>
  2. How is the 80-20 rule (Pareto's Principle) used in macroeconomics?

    The 80-20 rule was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century, ... Read Full Answer >>
  3. What are the origins of the 80-20 rule?

    The 80-20 rule was created by Dr. Joseph M. Juran in the late 1940s, but has its true origins in early 20th century Italy. ... Read Full Answer >>
  4. What are some real-life examples of the 80-20 rule (Pareto Principle) in practice?

    There are a number of practical applications for the 80-20 rule in diverse areas such as the distribution of wealth in economics, ... Read Full Answer >>
  5. How is the 80-20 rule (Pareto Principle) used in portfolios?

    The 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio’s growth. ... Read Full Answer >>
  6. How were the figures 80 and 20 arrived at in the 80-20 rule (Pareto Principle)?

    The 80-20 rule has its roots in early 20th century Italy. Economist Vilfredo Pareto – best known for the concepts of Pareto ... Read Full Answer >>
  7. How is the 80-20 rule (Pareto Principle) used in management?

    The 80-20 rule, also known as the Pareto principle, is meant to express a philosophy about identifying inputs. It is not ... Read Full Answer >>
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