THREAD // The Pareto Principle: 80/20 Rule
“The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.
Works with trading as well...
“The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.
Works with trading as well...
2 // The original observation was in connection with income and wealth. Pareto noticed that 80% of Italy’s wealth was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.
3 // Note that 80/20 is simply shorthand for a very lopsided relationship between causes & results. The numbers don’t have to add up to 100. In some cases, 30 percent of causes may lead to 70 percent of results. Or the split may be 80/10, or 90/10, or even 99/1.
4 // Researchers find that the top 20 percent of people, natural forces, economic inputs, or any other causes we can measure typically lead to about 80 percent of results, outputs, or effects.
Focus on the 20% that matters most!
Focus on the 20% that matters most!
5 // As a trend trader, it's likely that 20% of your trades result in 80% of your profits so focus on riding winners & cutting losers.
You may have an expectancy of 40% winning trades but it's likely that 80%+ of your year-end profits come from > 20% of your successful trades.
You may have an expectancy of 40% winning trades but it's likely that 80%+ of your year-end profits come from > 20% of your successful trades.
6 // In poker, 20 percent of the players will walk away with at least 80 percent of the stakes.
In retail, 20 percent of the sales staff will make more than 80 percent of the dollar value of sales.
In retail, 20 percent of the sales staff will make more than 80 percent of the dollar value of sales.
7 // Studies consistently show that 20 percent of customers lead to more than 80 percent of profits for any particular firm.
More than 80 percent of scientific breakthroughs come from fewer than 20 percent of scientists.
More than 80 percent of scientific breakthroughs come from fewer than 20 percent of scientists.
8 // Crime statistics repeatedly show that about 20 percent of thieves make off with 80 percent of the loot.
In horse racing, 80% of races are won by just 20% of jockeys.
In horse racing, 80% of races are won by just 20% of jockeys.
9 // The 80/20 rule argues that 20% of the input creates 80% of the output. Inputs & outputs aren’t the same thing, & therefore can’t be made into the same pie chart. The 80/20 Rule could just as easily been called The 55/3 Rule, if 55% of the results were created by 3% of inputs
10 // The 80/20 Principle: The Secret to Achieving More with Less Paperback - by Richard Koch
amazon.com/gp/product/038…
amazon.com/gp/product/038…
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