In 1975, Charles Goodhart, a respected moentary policy theorist who has spent most of his career at the Bank of England and the London School of Economics, uttered a perceptive phrase that came to be known as Goodhart’s Law. Today, his observation is cited regularly, across a variety of industries from banking to medicine to manufacturing, because it states a valuable insight about how the modern world operates.
Goodhart’s Law says that: “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”
Some years later, Marilyn Strathern, a British anthropologist, broadened Goodhart’s monetary policy comment, making it a more universally practical law: “When a measure becomes a target, it ceases to be a good measure.” In other words, as soon as we try to manipulate behaviors to alter a metric, it’s no longer useful.
We’ve all seen this in action. Focus exclusively on improving shipping performance, and quality is often compromised. Direct salespeople to increase orders without specifying which orders are preferable, and production performance or margins can be compromised.
In 2018, Wells Fargo & Co. paid $480 million to settle a class-action lawsuit in which investors accused the bank of securities fraud. It was an example of Goodhart’s Law. Wells Fargo employees were under strong pressure to cross-sell financial products, so to meet their goals, they simply faked new accounts. When determining performance metrics, stipulate what you specifically want, not a vague surrogate for it. Then pair your metric with a related benchmark.
“Our shipping performance target is “x% of due date with a returns rate of y.” “Pursue orders in accordance with our contribution margin targets.”
You get what you measure so be aware of your metrics.
How effectively are your metrics producing the results you expect?