“Forget the Pareto principal, it is so 1906” / The Pareto principal part 1

 

Five years after his Russian wife left him in Italy for a young servant, Vilfredo Federico Damaso Pareto made his most famous observation. He found that twenty percent of the population in Italy owned eighty percent of its land.

The year was 1906 and this observation, that had nothing to do with his wife’s abandoning him, did have a lot to do with his Sociological views on what was going on in Italy at that time.

“At the bottom of the Wealth, Men and Women starve and children die young. In the broad middle of the curve all is turmoil and motion: people rising and falling, climbing by talent or luck and falling by alcoholism, tuberculosis and other kinds of unfitness. At the very top sit the elite of the elite, who control wealth and power for a time — until they are unseated through revolution or upheaval by a new aristocratic class. There is no progress in human history. Democracy is a fraud. Human nature is primitive, emotional, unyielding. The smarter, abler, stronger, and shrewder take the lion’s share. The weak starve, lest society become degenerate.” He wrote.

His views, which he didn’t keep to himself, together with his arrogance, sarcasm and contempt towards those who didn’t agree with him, didn’t make him very popular among some people, and he would probably die young from unnatural causes if he wasn’t so good with swords as well as with words.

Vilfredo couldn’t predict that his observation on the distribution of land would turn into something much bigger and general. Something that we call today “the Pareto Principal” and means that 80% of the effects come from 20% of the causes.

80% of your company’s revenues come from 20% of your customers and from 20% of your products, 80% of your stock comes from 20% of your suppliers, 80% of your sales are achieved by 20% of the sales team, 80% of your problems at the office are caused by 20% of your employees, etc.

The understating that there is a Pareto principal cleared the way to the Pareto efficiency, meaning that we should focus on the 20% that are responsible to the 80% – be nicer to the 20% of our customers that buy 80% of our stuff, make better room in our store to the 20% of the products that generate 80% of our revenues etc.

The Pareto principal was also challenged by the long tail theory.

“Forget the Pareto principal, it is so 1906 “, said the people of the long tail theory, “The Internet has the potential to substantially increase the collective share of niche products, thereby creating a longer tail in the distribution of sales”.

In other words they said – the 80/20 was relevant when there was no long tail, when the number of different products in the store was definite and relatively small, but now, when there is an infinite number of products and unlimited shelves in the store, the 20% that generates 80% of the sales is now much bigger.

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