Goodhart's Law

Have you ever noticed how government 'indicators' hardly ever seem to provide an agreed and accurate measure of the subject? How they are set up in a fanfare of openness and promise then degenerate into confusion, mismanagement and accusation?

This is a principle that was defined in 1975, in a paper by chief economic advisor to the Bank of England Charles Goodhart. It became particularly popular for explaining the problems in the 1980s when Prime Minister Margaret Thatcher defined assorted metrics for managing monetary policy.

This principle is also true in business and other organizations. You define a 'success' measure but when it comes around to assessing success it doesn't seem to be that effective. There are several reasons for this. First, the world is not a simple place. To paraphrase a popular quote: 'For every problem there is answer that is simple, elegant and wrong.' Secondly and very significantly, when you set up a metric by which people are rewarded or punished and they will act to optimize that measure, including in ways that detrimental to other important things. As a salesman once told me: 'Tell me how I am measured and I'll tell you how I'll behave.' Well-meaning performance metrics easily lead to sub-optimal performance.

There is also a Reverse Goodhart's Law, which says that if a government's economic credibility is sufficiently damaged, then its targets are seen as irrelevant and, bizarrely, the economic indicators regain their reliability as a guide to policy. In the wake of the Thatcher years, Prime Minister John Major's stumblings had this effect.

So what should you do? Perhaps the best idea in recent times is the principle of the balanced scorecard, where measures act as checks and balances for one another and too much attention to one measure damages another.

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