Proof of Pareto’s 80/20 Law and Precise Limits for ABC-Analysis

In many projects 20% of the total effort yields 80% of the total outcome. This phenomenon is usually termed Pareto’s 80/20 law. In this paper we propose a theory to explain this empirical observation. The yield gained by the subdivision of a project into several tasks is measured. The requirements for such a yield lead to the axioms of Shannon Information. With the right adjustment of units for cost and yield this gives the definition of Entropic Yield. Pareto’s 80/20 law thus results from an economic optimization of Entropic Yield in the form of minimizing unrealized potential. As an application of the theory we have derived precise limits for ABC-analysis. The outlined theory adds to Information Theory the consideration of production costs for information. Furthermore it sheds some light on the connection between the physical term Entropy and Shannon Information. The theory can be applied in statistical data analysis, e.g. clusterand/or factor analysis, as well as in marketing, logistics or other business applications.