Vilfredo Pareto, an Italian economist born in 1848, was apparently also a keen gardener, and like all keen gardeners, Vilfredo knew not all plants are created equal. Some of them produced a great crop of abundance, and some of them had very little to offer. In fact, legend has it that Vilfredo noticed that 20% of his pea plants were producing 80% of the healthy pea produce.
This realization set Vilfredo on a voyage of discovery of other uneven distributions in life, particularly in relation to wealth. His discovery that 80% of the wealth in Italy was owned by 20% of the population was later found to be broadly true across many cities, countries and other geographic areas. This uneven 80/20 distribution formed the basis of what we today call the “Pareto Principle” or the “80/20 rule,” in recognition of the more general imbalance of inputs and outputs in many aspects of life.
For example, it has been found that:
- 20% of employees are responsible for 80% of results
- 20% of customers account for 80% of profits
- 20% of content in content marketing produces 80% of traffic
- 80% of pollution originates from 20% of all factories
These rules are not set in stone and the ratio often will not be exactly 80/20, but this uneven distribution of the “vital few and trivial many” is found in many aspects of life and business.
So, why does this matter, and what are the practical implications for you as a risk manager and an individual managing your own personal life?
Risk Management Applications
Risk management often involves examining a seemingly never-ending list of things that can go wrong and may result in negative consequences. There are many different drivers that can increase either the likelihood or severity of a risk event and risk professionals are tasked with trying to prioritize the risks and focus on the key drivers.
The Pareto Principle can help to clarify prioritization in risk management. For example, the 80/20 rule has been evidenced within occupational health and safety, with 20% of hazards shown to account for 80% of injuries. Other cited examples include 80% of computer system crashes coming from 20% of reported bugs, and 20% of drivers causing 80% of accidents.
The 80/20 rule serves as an important reminder that not all risk drivers are equal and that a key aspect of risk management is the ability to truly understand the drivers behind risks so that we can focus our attention on those that matter most.
Personal Implications
Perhaps one of the most profound personal takeaways from the Pareto Principle is the application to personal time management. We all know that some people manage to achieve extraordinary success in life, despite the fact that we are all constrained by the same 24 hours in each day. Arguably, many of the most successful business people are masters of prioritization and applying the 80/20 rule to their own personal time management. They recognize that not all tasks are created equal and, hence, they will carefully think about which tasks are their top 20% that will result in an 80% output. Then they get to work doing these tasks and delete, delegate or defer the other 80%. So the next time you have a list of 10 things on your to-do list, make sure to carefully choose the top two and get to work on them.