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Applying Pareto’s Economic Theories to Praxis

Introduction
Vilfredo Pareto graduated from the University of Turin and practiced as a civil engineer before
switching to economics, and becoming a famous economist known for his application of mathematics to
economic analysis. Pareto’s theories and research have been discussed several times in Praxis with several
different applications, including the Pareto Chart, the Pareto Principle, and Pareto Efficiency (relating to
Arrow’s Impossibility Theorem and Pairwise Comparison Matrices). The connections between these topics
and their limitations, however, are not developed in class.

Pareto Charts and Pareto Analysis


The first mention of Pareto occurred in Lecture 11, when discussing the point at which the return on
investment for “effort” expended is no longer worth the increase in anticipated grade [1]. The term “Pareto
graph” is used, with no clear explanation as to what part of the graph makes it a “Pareto” graph. In fact, the
Pareto Graph, more commonly called a Pareto Chart or Diagram refers to a chart with both bars and a line
graph, “where individual values are represented in descending order by bars, and the ascending cumulative
total is represented by the line.” [7] The Pareto Principle describes an imbalance in input vs. output, often
referring to how 20% of the input is responsible for 80% of the output. The principle is illustrated in the
graph in Lecture 11, but is only formally introduced in Lecture 29 [2]. In Lecture 29, Professor Foster goes
on to ask what are some of the major flaws in this principle [2]. In order to properly answer this question, the
Pareto Analysis should be considered, since this is the main method of implementing the Pareto Principle.
The Pareto Analysis involves rating a set of input facts with respect to the impact on their outcome, as either
desirable or undesirable [9]. In order to do this analysis, one would create a table with the important factors
and their frequency of occurrence as a percentage, arrange the rows in decreasing order of importance, and
then plot a curve and a bar graph, with cumulative percentage on the first y-axis, and the percent frequency
on the second y-axis, both with causes on the x-axis [10]. One would then draw a horizontal dotted line at
80%, separating the important and trivial causes [10]. Initially, this analysis seems as if it could help Praxis
students in the Recommendation phase when evaluating a set of alternatives against a set of objectives.
However, the key problem with this model is the heavy quantification of the importance of the objectives. As
discussed in Lecture 13, Praxis students have been warned about the tyranny of quantification, and have been
taught to avoid assigning numbers to anything that does not have a clear meaning and rating system already
defined. Furthermore, the analysis requires arbitrarily separating useful and trivial objectives at the 80% mark.
The 80-20 rule is merely a rule of thumb, and is not necessarily warranted in an engineering context. There is
no clear indication the last 20% of objectives is trivial. Rather, the Pareto Principle simply states that the
impact of the objectives on the associated success of an alternative will vary. As a result, this tool should
likely not be selected in Praxis, for activities such as the Design Critique that required an “additional criterion-
referenced or holistic convergence tool” [13].

Pareto’s Efficiency (also known as Pareto’s Optimality)


Another application of Pareto’s work in Praxis is Pareto’s Efficiency, which contributes to Arrow’s
Impossibility Theorem and the Pairwise Comparison Matrix. The concept of Pareto Optimality describes the

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selection in which there is no alternative where an individual (or objective) is better off (or satisfied better),
and there is no individual (or objective) who is worse off (or not satisfied as well) [15]. Pareto’s Efficiency is
considered a criteria in fair voting, as described in Arrow’s Impossibility Theorem [3]. The theorem explains
that it is impossible to have a social welfare function that allows for fair voting, that does not break at least
one of the “fairness” criteria [13]. The first criteria mentioned on Professor Foster’s slide on the theorem
states, “if every voter prefers alternative X over alternative Y, then the group prefers X over Y;” this is known
as the Pareto Efficiency [3]. In the following Praxis slides, however, Michael J. Scott and Erik K. Antonsson
explain why Arrow’s Impossibility Theorem does not have a direct impact on engineering design decisions [3].
One of the reasons for this is that the social choice problem involves all orderings being assigned equal
worth, whereas in engineering problems there is no need to do that for objectives [14]. Furthermore, the
“heart of the multi-criteria engineering problem is the inter-attribute comparison of attributes,” which is not
permitted in social choice problems [14]. These differences indicate that there should be a way to fairly select
an optimal alternative in the context of engineering design decisions, and will not be restricted by Arrow’s
Impossibility Theorem. Pareto’s Efficiency is also applied when using a Pairwise Comparison Matrix.
However, just as in the previous uses of Pareto’s economic theories, the problem lies in the ordering of
objectives. This step is crucial in pairwise comparisons, despite being based solely on the opinions of those
involved in the social change problem [16]. Depending on whether you choose to assign equal or ranked
values to the pairwise comparison, you end up with the problem associated with the Pareto Analysis or
Arrow’s Impossibility Theorem, respectively.

Conclusion
In conclusion, several of Pareto’s contributions to economics bring about one key fault when applied
to the engineering context of Praxis. Pareto’s theorems require assigning specific values to objectives in order
to rank their importance, despite not always having grounds to do so. Just as the first two applications of
Pareto’s economics were deemed not helpful in an engineering context, the pairwise comparison matrix
should receive the same assessment. These tools cannot effectively assess a set of alternatives in an
engineering context, and thus should not be used to draw final conclusions. However, given that the problem
in the Pareto Analysis is mirrored in the Pairwise Comparison, one may want to use the Pareto Analysis with a
similar amount of caution. A Pareto Chart succinctly shows the effect meeting an objective has on the
determined quality of the solution. Thus, this tool could be considered when fulfilling the Design Critique’s
requirement to include another criterion-referenced tool. The flaws in applying Pareto’s economic principles
to Praxis should always be considered whenever extending economic or social principles to engineering.
Economic theories are always based on several assumptions, such as “all other things being equal”, and
assuming people act rationally. These assumptions are not always warranted and will raise problems when
applied to an engineering context which requires large amounts of evidence. Therefore, one must carefully
consider all references to economic and social theory, specifically regarding the unwarranted actions and
assumptions involved, whenever applying them to engineering problems, such as the design decisions
discussed in Praxis.

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Source Extract
[1] J. Foster, ‘Lecture 11’, University of Toronto, 2017.

[2] J. Foster, ‘Lecture 29’, University of Toronto, 2017.

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[3] J. Foster, ‘Lecture 30’, University of Toronto, 2017.

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[4] Screenshot of “Pareto Graph” Google Search, Retrieved Dec. 6, 2017.

[5] "Pareto diagram", Pqsystems.com, 2017. [Online]. Available: http://www.pqsystems.com/


qualityadvisor/DataAnalysisTools/pareto_diagram.php. [Accessed: 06- Dec- 2017].

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[6] "Vilfredo Pareto", Encyclopedia Britannica, 2017. [Online]. Available: https://
www.britannica.com/biography/Vilfredo-Pareto. [Accessed: 07- Dec- 2017].

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[7] "Create a Pareto Chart", Tableau Online Help, 2017. [Online]. Available: https://
onlinehelp.tableau.com/current/pro/desktop/en-us/pareto.html. [Accessed: 06- Dec- 2017].

[8] https://www.investopedia.com/terms/p/paretoprinciple.asp

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[9] "Pareto Principle", Investopedia, 2017. [Online]. Available: https://www.investopedia.com/
terms/p/paretoprinciple.asp. [Accessed: 06- Dec- 2017].

[10] "Pareto analysis", En.wikipedia.org, 2017. [Online]. Available: https://en.wikipedia.org/wiki/


Pareto_analysis. [Accessed: 06- Dec- 2017].

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[11] J. Foster, ‘Lecture 20’, University of Toronto, 2017.

[12] J. Foster, ‘Design Critique’, University of Toronto, 2017.

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[13] "Arrow's Impossibility Theorem -- Math Fun Facts", Math Fun Facts, 2017. [Online]. Available:
https://www.math.hmc.edu/funfacts/ffiles/20005.8.shtml. [Accessed: 06- Dec- 2017].


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[14] M. Scott and E. Antonsson, "Arrow's Theorem and Engineering Design Decision Making",
Research in Engineering Design, vol. 11, no. 4, pp. 218-228, 1999.

[15] "Pareto efficiency", Economics.utoronto.ca, 2017. [Online]. Available: https://


www.economics.utoronto.ca/osborne/2x3/tutorial/PE.HTM. [Accessed: 06- Dec- 2017].

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[16]
A. Asudeh, G. Zhang, N. Hassan, C. Li, and G. Zaruba, “Crowdsourcing Pareto-Optimal Object
Finding by Pairwise Comparisons,” CIKM '15 Proceedings of the 24th ACM International on Conference on
Information and Knowledge Management, Nov. 2017.

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