Goodhart's Law Overview

Main

Goodhart's Law, established by British economist Charles Goodhart in 1975, states that "When a measure becomes a target, it ceases to be a good measure". In other words, when we set a specific metric as a goal, people will tend to optimize for that metric regardless of the consequences, often leading to unintended and undesirable outcomes.

For example, if a company sets a target for the number of new products launched, employees may rush to release products that are not fully tested or do not meet customer needs, ultimately harming the company's reputation and bottom line.

Terms

• Eponymic laws: Laws, principles, or adages named after the person who first proposed them, such as Goodhart's Law, Murphy's Law, or Parkinson's Law.

• Charles Goodhart: A British economist who served as a chief adviser to the Bank of England and is known for formulating Goodhart's Law. He is currently an Emeritus Professor of Banking and Finance at the London School of Economics.

• Measure: A metric or statistic used to assess the performance or quality of a system or process.

• Target: A specific goal or objective that a measure is intended to achieve or incentivize.

Analogy

In football (soccer), if a coach sets a target for the number of passes completed, players may focus on making safe, short passes rather than attempting riskier, more creative plays that could lead to scoring opportunities. The measure (number of passes) becomes a target, leading to a less effective and entertaining style of play.

Misconception

Many people believe that setting a single, clear metric as a target will always lead to improved performance. However, Goodhart's Law shows that this can often backfire, as people will game the system to optimize for the metric at the expense of other important factors.

History

1. 1975: British economist Charles Goodhart expresses the core idea of the adage in an article on UK monetary policy.

2. 1996: Keith Hoskin generalizes Goodhart's point to apply to accounting and evaluation systems.

3. 1997: Anthropologist Marilyn Strathern links the concept to the history of accounting in Britain dating back to the 1800s.

4. 2018: Jerry Z. Muller's book "The Tyranny of Metrics" further popularizes the concept.

How to use it

1. When setting goals or evaluating performance, use a balanced set of metrics rather than focusing on a single number to avoid unintended consequences.

2. Be aware that people will naturally try to optimize for whatever metrics they are judged by, so choose measures carefully and consider potential gaming of the system.

3. Regularly review and adjust metrics to ensure they are still aligned with overall objectives and not being manipulated.

Facts

• In a study, it was found that when surgeons' performance was evaluated based on patient mortality rates, they became more likely to avoid operating on high-risk patients, potentially denying life-saving care to those who needed it most.

• A survey revealed that 92% of companies believe that using metrics can lead to unintended negative consequences if not implemented carefully.

• In the early 2000s, Enron's focus on revenue growth as a key metric led to widespread accounting fraud and ultimately the company's collapse, causing billions in losses for investors.

• According to a Harvard Business Review article, the average company tracks more than 27 different metrics, but fewer than 5% of employees understand how their work contributes to the company's overall strategy.

• In his paper, Charles Goodhart warned that relying too heavily on a single measure for monetary policy, such as interest rates or money supply growth, could lead to economic instability.