Goodhart's Law in the professional field

Main

Goodhart's Law essentially states: "When a measure becomes a target, it ceases to be a good measure." This principle is very important in professional activities because it helps identify the "pitfalls" associated with excessive focus on a single indicator. For example, if a company decides to focus solely on increasing sales volume, it may overlook other important aspects such as customer satisfaction or product quality.

A real-world example is the Wells Fargo scandal, where employees were pressured to sell financial products, leading to the creation of millions of unauthorized accounts to meet targets.

Analogy

Imagine a soccer team that decides to focus only on scoring goals. They might start shooting from any point on the field, neglecting teamwork and strategy. While they might score more goals, their overall performance could suffer. This is Goodhart's Law in action.

Misconception

A common misconception about Goodhart's Law is that it prevents setting goals and objectives. This is not true. The law simply warns us that excessive focus on one indicator can lead to unforeseen consequences. For example, a company might set a goal to reduce the number of customer complaints. To achieve this, they might start ignoring or not registering complaints, which does not solve the underlying problems.

History

1. Goodhart's Law is named after British economist Charles Goodhart, who formulated it in the late 20th century.

2. Over time, this law has been applied in various fields, from economics to education, and used to criticize excessive reliance on individual indicators.

3. Charles Goodhart once said: "Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes."

How It Can Be Used

1. Performance Management: As a manager, you can use Goodhart's Law to ensure a balanced approach to employee performance metrics. Instead of focusing solely on sales, consider other factors such as customer satisfaction and employee morale. The main benefits of using this knowledge are a more holistic view of performance and the prevention of unforeseen negative consequences.

2. Healthcare: If you are a hospital administrator, Goodhart's Law can help you develop policies that consider multiple outcomes. For example, if the goal is to reduce readmission rates, focusing only on quick patient discharge might lead to inadequate care. Considering other factors, such as patient education and follow-up, can lead to more sustainable results. The main benefits of using this knowledge are more effective policies and the prevention of harmful side effects.

3. Finance: If you are a financial analyst, Goodhart's Law helps you avoid excessive reliance on a single indicator, such as earnings per share (EPS). Focusing only on EPS can lead to financial engineering or short-term strategies that harm long-term growth and sustainability.

Facts

• Goodhart's Law is applicable not only in economics or business. It can be applied in various fields—from education to healthcare and even personal life.

• The Volkswagen emissions scandal, also known as "Dieselgate," is another example of Goodhart's Law. To meet strict emissions standards, the company installed software in its diesel cars to manipulate emissions data during testing. This led to nitrogen oxide emissions exceeding legal limits by 40 times under normal driving conditions.

• In the 1990s, Sears Auto Centers faced a similar problem when they set high sales targets for their auto repair staff. This led employees to inflate prices or perform unnecessary repairs to meet targets.

• Another example is the Enron scandal, where the focus on maintaining high stock prices led to widespread accounting fraud and ultimately the company's collapse.

• In healthcare, a mid-2000s scandal in the UK's National Health Service (NHS) revealed that some hospitals manipulated patient data to meet government-set targets.

• In academia, universities often focus on certain metrics, such as the number of publications or student evaluations, for promotions or funding. This can lead to issues like a "publish or perish" culture, grade inflation, or neglecting important but less quantifiable aspects of education.