Michael E. Fournier MBA

The First Universal Truth

In Pareto Distribution, Universal Truth on July 6, 2011 at 3:21 am

A universal truth is a sociological theory that explains rationally why people behave the way they do, similar to Adam Smith’s ‘invisible hand’.  The first universal truth, first only because I am most familiar with it, not because it is most important, is the Pareto Distribution, or the 80/20 rule.

Vilfredo Pareto was a mathematician who came up with the hypothesis that a large percentage of outcomes result from a small percentage of inputs.  From business applications:  a small percentage of our customers are responsible for a large percentage of our profit; a small percentage of our products are responsible for a large percentage of the cost.  From life; a small percentage of the people involved in an association are responsible for a large percentage of the activity of the association, a small percentage of the people who attend church, are responsible for a large amount of the tithing; and so on.  We can see intuitively that these hypotheses are correct, and even if we are not sure, it is fairly easy to test with any random group of people.

Why is the Pareto Distribution an important concept to know?  If you are in an organization and understand that a large percentage of the activity results from a small percentage of the members, it does little good to try and get the large percentage of members to become more active, rather the thing to do is increase the size of the membership so that the small percentage of inputs results from a larger number.  The pareto distribution applies in situations where humans are involved and many non-human statistical applications.  In fact, I cannot think of any situation in which it would not apply.

The First Universal Truth, the Pareto Distribution, also applies to economic situations.  It is important to know.

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