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Pareto Principle is just a power-law distribution

· One min read

In finance and economics, the Pareto principle has been used as a rule of thumb for a long time.

  • The Pareto principle states that in many situations, roughly 80% of the effects come from 20% of the causes. This might mean:
    • 80% of a company's profits come from 20% of its customers.
    • 80% of software bugs stem from 20% of the code. However, what the underlying data says is that the phenomenon a Pareto law applies to means that the data likely is power-law distributed.
      A power-law distribution is a mathematical relationship where the probability of a certain value is inversely proportional to some power of that value. Most of the phenomena in the real world can be modeled by either normal or Gaussian distributions or power law distributions (This will probably follow some sort of Pareto principle). Just doing some sort of heuristic on the Pareto principle can tell you a lot about the distributions and how they behave.