PARETO’S LAW AND PRINCIPLE: A theory on Management

A Written Report
Presented to
PROF. JALILA D. IBRAHIM-LIMUG, RSW, MPA, CAR
Faculty of the Department of Social Work
College of Public Affairs
Mindanao State University – Main Campus Marawi
City

In Partial Fulfilment
Of the Requirements for the Course
BSW195- SOCIAL WELFARE AFENCY ADMINISTRATION
2nd Semester A.Y. 2023-2024

By
BANTAS, AYESHA MAE P.

March 12, 2024

 Vilfredo Federico Damaso Pareto was
born on July 15, 1848. He was an Italian
thinker with expertise in economics,
sociology, and philosophy. Although
initially trained in engineering, Pareto
utilized mathematical methods to delve into
economic studies. Despite facing challenges
in disseminating his ideas during his
lifetime, Pareto's contributions, notably the
concept later termed the 80-20 principle—
asserting that 80 percent of wealth is held
by
20 percent of the population—have been
widely applied and valued in various
economic and managerial contexts.

Pareto's insight into the limitations of purely economic analysis in comprehending human
society, recognizing that human decision-making is influenced not only by rationality but
also by emotional factors, played a pivotal role in the emergence of behavioral economics.
Regrettably, Pareto's sociological theories were misappropriated by Benito Mussolini in
the formation of Italian fascism, despite Pareto's own disavowal of both fascism and
Marxism.

In 1870, he completed his engineering studies at what is currently known as the

Polytechnic University of Turin. His dissertation, titled The Fundamental Principles of
Equilibrium in Solid Bodies, laid the groundwork for his later exploration of equilibrium
analysis in the realms of economics and sociology.

Following graduation, he pursued a career as a civil engineer, initially employed by the

state-owned Italian Railway Company before transitioning to roles within the private
sector. By 1886, he had begun teaching economics and management at the University of
Florence. Subsequently, in 1893, he assumed a professorship in economics at the
University of Lausanne in Switzerland, where he remained until his passing on August 19,
1923, in Lausanne.
The 80/20 rule or The Pareto Principle

The principle is known as the 80-20 rule was initially utilized in macroeconomics to
depict wealth distribution in Italy during the early 20th century. Pareto's observation of
his garden revealed that 20% of the pea pods yielded 80% of the peas, which he later
extrapolated to macroeconomics, demonstrating that 80% of Italy's wealth was
concentrated in the hands of 20% of its population.

The principle conceptualized that 80% of results or outcomes stem from 20% of
underlying causes or inputs. Often employed to illustrate that a significant portion of a
company's revenue, typically 80%, is generated by a minority, around 20%, of its clientele.
From this perspective, it could be strategic for a company to concentrate its efforts on
catering to this crucial 20% of customers responsible for most revenues. This targeted
approach may lead to the retention of these key clients while potentially attracting new
clients with similar traits. However, beyond its surface interpretation lies a deeper
significance to the 80-20 rule.

According to Pareto, for many events roughly 80% of the effects come from the 20% of
the causes. Pareto had observed the rule in the following:

1. WEALTH- 80% of the country’s wealth came from the 20% of the population.
2. COMPANY’S REVENUE- 80% of the sales are coming from the 20% of the
customers.
3. CRIME- 80% of the crimes are due to the same 20% of the criminals.

Example:

Studying or reading books as preparation for the upcoming examinations. Out of

100% of the books the students must read, 20% coming from a specific book will
generate 80% of the output of the student during the exam. This means knowing
the more important topics and giving more attention to it will create greater
possibility of passing the upcoming examinations.

In relation to the 80/20 rule, Pareto Chart.

 PARETO CHART

is a distinctive type of bar graph that

arranges data in descending order, with
the most significant datasets positioned
on the left and diminishing values to the
right. It is commonly utilized by project
management teams as a tool for
visualizing data and enhancing project
outcomes.
Pareto Chart Template - Pareto Analysis in Excel with Pareto
Diagram The primary purpose of Pareto charts is to
(https://www.vertex42.com/ExcelTemplates/pareto-chart.html) assist teams in pinpointing the most
critical data within a dataset, enabling them to concentrate their efforts on areas that will
yield the most substantial impact. In essence, Pareto charts serve two main functions:
they provide a visual representation of datasets and prioritize the most important data.
The Y-axis, located on the left side, denotes the frequency of specific data, while the Xaxis,
positioned along the bottom, displays the categories.

Pareto charts serve as valuable data visualization tools for project management teams,
aiding in their decision-making processes. A crucial aspect of effective project
management is the ability to grasp the overall picture and prioritize tasks or issues
according to their impact. Pareto charts excel at facilitating rapid identification of the
most impactful areas within a dataset to prioritize, as illustrated in the example above.
Additionally, teams can utilize the smaller, less significant data sets to identify areas
requiring less attention.

Key Terminologies: 80% or the Trivial Many and 20% or the Vital Few

In the example above, problems or the causes are arranged in a descending order which
is reflected on the frequency on the left side represents the number of times how the
problems have occurred. On the other side is the cumulative percentage corresponding
to the frequency. Through identifying the point of intersection of the two y-axes, the 20%
or the vital few which is the left side of the chart, and 80% or the trivial many on the
right, will be distinguished. The representation makes identifying the most impactful
causes of the problem why the presenter experienced difficulties on their presentation.

In conclusion, this can be used after program implementations. The use of Pareto Chart
is an effective evaluative tool for social workers in a way that it gives clearer focus on what
should be done better for the further implementations.

PARETO EFFICIENCY/OPTIMALITY

At a Pareto optimum, no more changes can be made to the allocation without making
someone worse off. This denotes an economic condition where reallocating resources to
improve the welfare of one individual would necessarily diminish the welfare of at least
one other individual. This concept highlights the optimal allocation of resources without
suggesting equality or fairness.

There are the points or situation where the allocation is Pareto Efficient—also known as
Pareto optimal, for example:

In the case of IDPs in Marawi City, there are 20 permanent shelters that would be given
to families used to reside in the Most Affected Areas during the war. The most qualified
and most deserving families to receive the housing grant will not be given the opportunity
to have their name listed due to the unjust governance of the city mayor which identified
some specific families as voters of his opposing party. Instead, the city mayor decided to
give the 15 shelters to his identified voters even if they do not reside in the MAA, and gave
only 5 to the voters of the opposing party.

Without considering the fairness of his action, other families who deserved permanent
shelter had a negative impact. The city mayor’s decision represents Pareto Efficiency or
Pareto Optimality.

PARETO IMPROVEMENT

Pareto improvement is an action that makes at least one person better off without making
anyone worse off. Given an initial allocation of goods or resources for a set of individuals,
if a change in resources benefits at least one person while harming no one else, a Pareto
improvement has been made.

Example:

Juan and Maria are members of ORG123. Juan is a good layout artist, and Maria is the
documenter, but she also loves editing. Their project head assigned the task of lay outing
to Juan because it is the only thing he was good at while Maria is assigned on documenting
because she equally prefers any of the two.

The decision of the project head shows Pareto Improvement because the designation was
fair in consideration to the capacities and preference of the members. This backs up to the
goal of Pareto improvements in the general economy, that is to create a net benefit to
society that also does not harm any member of the society.
 REFERENCES:

Chen J. (2021). Investopedia. Pareto Improvement: Definition, Examples, Critique.

Pareto Improvement: Definition, Examples, Critique (investopedia.com)

Good L. (2024). Project Management. What is a Pareto Chart? Definition, Examples When to
Use. What is a Pareto Chart? Definition, Examples & When to Use (project-management.com)

New World Encyclopedia. Vilfredo Pareto. Vilfredo Pareto - New World Encyclopedia

Tardi C. (2023). Investopedia. The 80-20 Rule (aka Pareto Pinciple): What it is, How it Works

The 80-20 Rule (aka Pareto Principle): What It Is, How It Works (investopedia.com)

The Investopedia Team. Pareto Efficiency Examples and Production Possibility

Frontier.Pareto Efficiency Examples and Production Possibility Frontier (investopedia.com)