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 outcomes, roughly 80% of consequences come from 20% of causes (the "vital few").

In 1941, management consultant Joseph M. Juran developed the concept in the context of quality control and improvement after reading the works of Italian sociologist and economist Vilfredo Pareto, who wrote in 1906 about the 80/20 connection while teaching at the University of Lausanne. In his first work, Cours d'économie politique, Pareto showed that approximately 80% of the land in the Kingdom of Italy was owned by 20% of the population. The Pareto principle is only tangentially related to the Pareto efficiency.

Mathematically, the 80/20 rule is associated with a power law distribution (also known as a Pareto distribution) of wealth in a population. In many natural phenomena certain features are distributed according to power law statistics. It is an adage of business management that "80% of sales come from 20% of clients."

In 1941, Joseph M. Juran, a Romanian-born American engineer, came across the work of Italian polymath Vilfredo Pareto. Pareto noted that approximately 80% of Italy's land was owned by 20% of the population. Juran applied the approximation that 80% of problems stem from 20% of the causes to the field of quality management. Later during his career, Juran preferred to describe this as "the vital few and the useful many" to highlight the contribution of the remaining 80% should not be devalued.

The demonstration of the Pareto principle is explained by a large proportion of process variation being associated with a small proportion of process variables. This is a special case of the wider phenomenon of Pareto distributions. If the Pareto index α, which is one of the parameters characterizing a Pareto distribution, is chosen as α = log₄5 ≈ 1.16, then one has 80% of effects coming from 20% of causes.

The term 80/20 is only a shorthand for the general principle at work. In individual cases, the distribution could be nearer to 90/5 or 70/30. Note that there is no need for the two numbers to add up to the number 100, as they are measures of different things. The Pareto principle is an illustration of a "power law" relationship, which also occurs in phenomena such as bush fires and earthquakes. Benoit Mandelbrot offered an explanation for this pattern in the field of economics and social science based on income dynamics in population. According to his reasoning, above a certain minimum income threshold, the probability of an individual's income increasing or decreasing by a fixed proportion (e.g., doubling) remains constant across all income levels. As a consequence, the ratio of individuals earning a given income x to those earning half that amount x/2 remains the same, regardless of the absolute value of x. This scale-invariant property is a defining feature of power-law distributions. Because it is self-similar over a wide range of magnitudes, it produces outcomes completely different from Normal or Gaussian distribution phenomena. The occurrence probability of rare extreme (or catastrophic) events showing power-law distribution may be of several orders of magnitude greater than that associated with other usual models, such as, e.g., Gaussian or exponential. This fact explains the frequent breakdowns of sophisticated financial instruments, which are modeled on the assumption that a Gaussian relationship is appropriate to something like stock price movements.

Using the "A:B" notation (for example, 0.8:0.2) and with A + B = 1, inequality measures like the Gini index (G) and the Hoover index (H) can be computed. In this case both are the same:

Pareto analysis is a formal technique useful where many possible courses of action are competing for attention. In essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most effective actions that deliver a total benefit reasonably close to the maximal possible one.