• The Pareto Principle, or 80/20 rule, explains that a small number of causes lead to the majority of effects; in other words, 20% of your efforts yield 80% of the results.
• It originated with Vilfredo Pareto’s observation of wealth distribution in Italy.
• In real estate, finance, and land investing, it aids in identifying key areas for investment and growth.
• Critics argue that it can lead to oversimplification and does not always precisely apply to real-world scenarios.

The Pareto Principle states that a small number of causes can lead to most effects. In many cases, this small number is about 20% and the effects to 80%, hence why it’s commonly known as the “80/20 Rule.”

The Pareto Principle applies to many disciplines. For example, around 20% of products might be responsible for 80% of revenue in sales. This concept can drive marketing strategies and product line focus.

Meanwhile, the Pareto Principle helps model income distribution, market behaviors, and other complex economic systems. Economists and financial analysts use these mathematical tools to understand underlying patterns[1], make predictions, and guide policy and investment decisions.

The Pareto Principle is named after the Italian economist Vilfredo Pareto. In the late 19th century, he noticed that only 20% of the population held 80% of Italy’s wealth[2]. Later, he also observed the same in his garden, where only 20% of his plants bore 80% of the fruit. This observation eventually led to the creation of a rule that found its way into various areas of business, economics, and more.

The Pareto Principle offers valuable insights and actionable strategies on the following aspects of real estate investing:

• Profit generation: A common observation in real estate is that around 20% of properties might generate 80% of profits. Identifying and focusing on these properties can lead to more strategic investments and marketing efforts.
• Customer relationships: In real estate sales, 20% of clients may contribute to 80% of revenue. Building and maintaining relationships with these key clients can significantly impact success.
• Maintenance and management: Property managers and landlords may find that 20% of maintenance issues[3] consume 80% of their time and resources. Recognizing these issues can lead to targeted solutions, reducing costs and enhancing efficiency.
• Location analysis: Real estate investors often identify that 20% of locations within a market may drive 80% of the demand or value appreciation. Targeting investments in these prime locations can maximize returns.
• Market trends and analysis: Understanding which market segments follow the 80/20 rule allows investors to anticipate changes, allocate resources more effectively, and implement responsive strategies.

Land Investing

Applying the Pareto Principle in land investing is similar to many other forms of real estate. However, it’s also generally true in many facets of land investing, such as:

• Agriculture: Some farmers may discover that 20% of their arable land can produce 80% of certain crops[4]. Recognizing this pattern helps farmers and landowners make informed decisions about land use, crop rotation, and resource allocation.
• Zoning and land use: Compliance with zoning and land use regulations often follows the Pareto Principle, where a few rules might constitute the majority of compliance requirements. Understanding this dynamic can simplify regulatory navigation.
• Environmental considerations: In sustainable land management, 20% of interventions might lead to 80% of desired ecological outcomes. Employing the Pareto Principle can guide conservation efforts, resource management, and curbing carbon emissions[5].

RELATED: 070: The 10X Rule vs. 80/20 Principle – What’s the Right Way to Run Your Business?

The Pareto distribution is a mathematical way to describe the 80/20 rule. Like the Gaussian or “bell curve” model, it’s a statistical distribution graph[6] with a J shape that falls sharply as the X-axis increases.

Here’s the formula for the Pareto distribution:

Now, let’s break down what these symbols mean:

• x: This is the variable we’re looking at. It could represent anything from the number of products sold to the time spent on a task.
• α: This is known as the “shape parameter.” It helps describe how steep or flat the distribution is. A higher value of α means the distribution will be steeper.
• Xm: This is the “scale parameter.” It’s like a starting point for the distribution, telling us where the curve begins.

Note that x should be greater than or equal to Xm.

Here’s what it looks like in real life, based on the Forbes List of billionaires per country[7]:

Sustainability 2019, Corporate Social Responsibility (CSR) in Developing Countries: Current Trends and Development

Although widely used, the Pareto Principle has its fair share of criticism. Here’s a look at some of the concerns:

• Inconsistent ratio: The 80/20 rule might not be consistent. Sometimes it could be 70/30 or 90/10. This inconsistency questions the universal applicability of the principle.
• Oversimplification: The Pareto Principle simplifies complex phenomena into a fixed ratio. This reduction might lead to misunderstandings or a need for more nuance in analysis.
• Potential for errors: Relying solely on the 80/20 rule without considering other important factors could lead to mistakes in judgment and decision-making.
• Ethical considerations: In some contexts, focusing only on the 20% that appears most critical might lead to unequal attention or resource allocation, creating ethical concerns[8].

In addition, many of its opponents cite that the Pareto Principle tells you what happens but not why it happens. Knowing the pattern without understanding the underlying cause might limit its practical usefulness.

This is one reason that the Pareto Principle typically has insufficient evidence to support its application in all situations. While observable and mathematically proven in many fields, its use isn’t consistently replicated.

How is the Pareto Principle used in daily life?

Many people unknowingly use the Pareto Principle in everyday decisions. For example, you might find that you wear 20% of your clothes 80% of the time or that 20% of your tasks result in 80% of your overall productivity.

Does the 80/20 rule apply to personal finances?

Yes, in personal finances, some find that 20% of their spending habits might be responsible for 80% of their expenses. You can even think of the Pareto Principle in personal finance as a simplified version of the 50/30/20 Rule[9], where you save 20% of your income and the rest toward your unavoidable expenses.

Why is the Pareto Principle important in business?

Understanding the Pareto Principle can help companies identify and focus on the most profitable areas. It can lead to better resource allocation, higher efficiency, and increased profitability.

Are there exceptions to the 80/20 rule?

While the Pareto Principle is a useful guideline, there are exceptions. One problem with the Pareto Principle is that it’s highly quantitative, which means it doesn’t account for qualitative factors[10]. For example, a relationship with a seller and a buyer isn’t just about the numbers but also the other intangibles (such as the buyer’s network) they bring to the closing table.

Using the principle as a tool or guidance is essential rather than a strict rule.

1. Craft, R.C. and Leake, C. (2002.) The Pareto principle in organizational decision making. Management Decision, Vol. 40 No. 8, pp. 729-733. Retrieved from https://doi.org/10.1108/00251740210437699
2. Laoyan, S. (2022, December 8.) Understanding the Pareto principle (The 80/20 rule). Asana. Retrieved from https://asana.com/resources/pareto-principle-80-20-rule
3. Shah, S. (2017, September 10.) The Pareto Principle in Property Management. Scale123. Retrieved from https://www.scale123.com/pareto-principle-property-management/
4. Gleeson, T. (2014, July 30.) 20 Percent of Farms Produce 80 Percent of the Value. University of Illinois. Retrieved from https://will.illinois.edu/agriculture/note/20-percent-of-farms-produce-80-percent-of-the-value
5. Miller, R. (2020, February 24.) Can We Address Emissions Using The Pareto Principal? [sic] Energy Central. Retrieved from https://energycentral.com/c/pip/can-we-address-emissions-using-pareto-principal
6. Haley, C. (2022, March 15.) Explaining the 80-20 Rule with the Pareto Distribution. Open Berkeley. Retrieved from https://dlab.berkeley.edu/news/explaining-80-20-rule-pareto-distribution
7. Chen, K., Chien-Chiang, L., and Huolien T.. (2019, March 27.) Taxation of Wealthy Individuals, Inequality Governance and Corporate Social Responsibility. MDPI, Sustainability 11, no. 7: 1851. Retrieved from https://doi.org/10.3390/su11071851
8. Farber, D. (2003, February 20.) The Problematics of the Pareto Principle. University of California, Berkeley – School of Law. Retrieved from http://dx.doi.org/10.2139/ssrn.384142
9. Kibet, L. (2021, March 4.) What Is the Pareto Principle or 80/20 Rule and How Is It Best Applied for Finance? GOBankingRates. Retrieved from https://www.gobankingrates.com/money/financial-planning/pareto-principle/
10. 80-20 Rule Is a Good One, but There Are Exceptions. (n.d.) Business Opportunity. Retrieved from https://businessopportunity.com/80-20-rule-good-guide-but-exceptions/