The 80/20 Rule: What It Is and How It Works

The 80/20 Rule is everywhere. It describes situations where a small number of inputs causes a large majority of outputs. From chronic homelessness to wealth inequality, this simple concept is at the heart of some society’s biggest challenges.

Lessons from the Garden

In 1896, Italian economist named Vilfredo Pareto made an interesting observation in his garden. 20% of his pea pods were responsible for 80% of all the peas he harvested.

Intrigued, Pareto started looking to see if this phenomenon was present in other contexts too. To his surprise, he soon discovered that 20% of Italians owned 80% of the land in Italy.

As he continued to make observations like this, he eventually developed the “Pareto Principle,” or as it’s more commonly known today, the 80/20 rule. It states that 80% of outputs tend to come from 20% of inputs:

The 80/20 Rule Is Everywhere

If you start looking for it, you’ll notice that the 80/20 Rule can be found in a wide variety of different settings.

• In business, 80% of sales come from 20% of clients.
• 20% of criminals commit 80% of crimes.
• 20% of drivers cause 80% of all traffic accidents.
• 80% of pollution originates from 20% of all factories.
• 80% of software problems are caused by 20% of bugs.

Importantly, it doesn’t have to be a perfect 80/20 to see the relationship. For example, when we look at statistics on wealth and income inequality, we find:

• 10% of Americans own 84% of all stocks.
• 25% of workers in this country earn 68% of the total income.
• The top 20% of Americans own 86% of all wealth.

The Basic Components of Any System

To understand what’s causing the 80/20 Rule, we need a quick primer on systems thinking.

Imagine a very simple system like a bathtub. All systems are made up of elements, interconnections, and goals. A bathtub’s elements are the faucet, the tub, and the drain. These elements are connected by the flow of water. And the purpose of a bathtub is to hold water, so people can clean themselves.

In addition to elements, interconnections, and goals, when describing a system like a bathtub, systems thinkers use three other critical concepts — stocks, flows, and feedback loops.

According to the great systems thinker Donella Meadows, “Stocks are the elements the system that you can see, feel, count, or measure at any given time. A system stock is just what it sounds like: a store, a quantity, an accumulation of material or information that has built up over time.” Stocks might be water in a bathtub, a population of people, money in the bank, the amount of land owned, or peas in a crop.

Stocks are impacted by flows. Flows are what go into and come out of systems. “Flows are filling and draining, births and deaths, purchases and sales, growth and decay, deposits and withdrawals, successes and failures. A stock, then, is the present memory of the history of changing flows within a system.”

A feedback loop is formed when changes in a stock affect the flows into or out of that same stock. We see this all the time. The amount of money in a bank account determines how much interest is going to come into the account. When your apartment’s thermostat gets above 72, you know the AC is going to turn on and pump cooler air.

There are two types of feedback loops. Reinforcing / balancing feedback loops work to keep a stock the same. For example, most systems have some sort of ideal state of being, like your body striving to be 98 degrees. Balancing feedback loops work to ensure that ideal state is maintained. They’re like a thermostat.

By comparison, some systems have reinforcing / runaway feedback loops. These loops can cause a system to spiral out of control. Think about a snowball rolling down a hill. As it gains more snow, it gains more momentum, and as it gains more momentum, it gains more snow. That’s where the term “snow-balling” comes from. There are many examples of this type of out-of-control feedback loop:

• The Cold War Arms Race — The US was the first country to develop a nuclear weapon. After the USSR developed one, each country got locked in a “tit for tat” effort to one up each other with increasingly powerful bombs that could be deployed in increasingly innovative ways.
• Lobbying — A business hires a lobbyist to advocate for regulations that will benefit the company. The lobbyist is successful, and politicians change the regulations. With the new regulations, the business makes even more money, hires even more lobbyists, and lobbies for even more rule changes.
• Compound Interest — To be fair, these “runaway” systems aren’t always bad. For example, when we put money in the bank, we receive significantly more benefit if our money “compounds” over time. With compounding, we earn interest on our original deposit, and then we earn interest on the new total. This happens again and again, resulting in more and more interest.

The 80/20 Rule and Reinforcing Feedback Loops

It’s critical to understand these basic systems concepts because the 80/20 Rule is generally the result of reinforcing feedback loops. Thinking back to Pareto’s peas, is it really that surprising that some plants will produce so much more than others? Based on the unique geography in a garden, some pea pods might get more water, sunlight, and/or nutritious soil than other pea pods. These inputs allow those particular plants to grow deeper roots and bigger leaves, which in turn allows them to collect more water, more nutrients, and more sunlight. This leads to even deeper roots and bigger leaves. This cycle can just keep repeating — it’s a reinforcing feedback loop.

The exact same dynamic is happening with wealth, whether it be land in the Italian countryside or the US stock market. Wealth creation can become a reinforcing feedback loop. When you have money, it is easier to make more money because you can invest in more sophisticated assets like the stock market or real estate. Of course there is always risk. The stock market can crash. Real estate bubbles can burst, but overall, at a systemic level, as these assets increase in value, people can reinvest their earnings to make even more money.

The 80/20 Rule is yet another example that a systemic lenses often provides simple explanations for even the most complex problems.