Pareto Principle ( Life isn't fair ! )

In 1906, Italian economist Vilfredo Pareto noted that 80% of Italy's land was owned by 20% of the people. 

He became somewhat obsessed with this ratio, seeing it in everything. For example, he observed that 80% of the peas in his garden came from 20% of his pea plants. 

The 80:20 ratio of cause-to-effect became known as the Pareto Principle. 

The Pareto Principle is the observation (not law) that most things in life are not distributed evenly. It can mean all of the following things:

• 20% of the input creates 80% of the result
• 20% of the workers produce 80% of the result
• 20% of the customers create 80% of the revenue
• 20% of the bugs cause 80% of the crashes
• 20% of the features cause 80% of the usage
• And on and on…

However, be careful when using this idea! First, there’s a common misconception that the numbers 20 and 80 must add to 100 — they don’t!

20% of the workers could create 10% of the result. Or 50%. Or 80%. Or 99%, or even 100%. Think about it — in a group of 100 workers, 20 could do all the work while the other 80 goof off. In that case, 20% of the workers did 100% of the work. So the 80/20 rule is just  a rough guide about typical distributions.

Also recognize that the numbers don’t have to be “20%” and “80%” exactly. The key point is that most things in life (effort, reward, output) are not distributed evenly – some contribute more than others.

The pareto principle has become a popular business maxim. It has been used to describe everything from economics to projects. 

1. 80% of value is achieved with the first 20% of effort 
   Project teams commonly report that a task is almost completed after a short time. A long time may pass after that before they report any further progress.
2. 80% of problems originate with 20% of projects 
   Some projects are far more problematic than others.
3. 80% of work is completed by 20% of your team 
   The observation that there is often a wide performance gap between your top performers and the rest of your team.
4. 80% of sales come from 20% of your clients 
   Many businesses are dependent on their largest accounts.
5. 80% of your complaints come from 20% of your customers 
   This is a commonly cited customer service rule of thumb.
6. 80% of wealth is owned by 20% of people 
   Pareto's 1906 observation that 80% of Italy's wealth (land) was controlled by 20% of people has held up extremely well. Today, 20% of the world's population controls 82.7% of wealth.

The Rule Of 72

The Rule of 72 is a great mental math shortcut to estimate the effect of any growth rate, from quick financial calculations to population estimates. Here’s the formula:

Years to double = 72 / Interest Rate

This formula is useful for financial estimates and understanding the nature of compound interest. Examples:

• At 6% interest, your money takes 72/6 or 12 years to double.
• To double your money in 10 years, get an interest rate of 72/10 or 7.2%.
• If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
• If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy doubles in 18 years. Given the speed at which technology develops, shaving years off your growth time could be very important.

You can also use the rule of 72 for expenses like inflation or interest:

• If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years.
• If college tuition increases at 5% per year (which is faster than inflation), tuition costs will double in 72/5 or about 14.4 years. If you pay 15% interest on your credit cards, the amount you owe will double in only 72/15 or 4.8 years!

The rule of 72 shows why a “small” 1% difference in inflation or GDP expansion has a huge effect in forecasting models.

By the way, the Rule of 72 applies to anything that grows, including population. Can you see why a population growth rate of 3% vs 2% could be a huge problem for planning? Instead of needing to double your capacity in 36 years, you only have 24. Twelve years were shaved off your schedule with one percentage point.

Source : Learn Right Not Rote