Goodgart's Law is a rule of thumb formulated by Bank of England adviser Charles Goodgart in 1975. It states that any measure that becomes a target ceases to be a reliable measure. Although Goodgart spoke of this in the context of monetary policy, the phrase that became a catchphrase—”When a measure becomes a target, it ceases to be a reliable measure”—was later popularized by anthropologist Marilyn Strathern. The essence of the law is that when people know by what measure they are being measured, they begin to optimize that measure, often to the detriment of the overall goal.
Since the formulation may seem somewhat abstract, it is worth giving an original example. Charles Goodhart found that when a central bank tried to control inflation by targeting a certain measure of the money supply (for example, the volume of loans), commercial banks quickly found a way to circumvent this restriction. They created new financial instruments and alternative forms of lending that did not count towards the target. As a result, the formal goal (controlling the metric) was achieved, but the real goal (containment of overall credit and inflation) was failed, because the system simply adapted to circumvent the rules.
Goodhart's Law Beyond Economics
Soon, Goodhart's law was mentioned again, only this time the topic of discussion was not related to monetary policy. Economist Thorsten Beck published a note in which he shared his observations about the World Bank's “Doing Business” ranking of countries. Governments of various countries set the task for officials to move as high as possible on this list, because a high position promised the inflow of foreign investment.
Torsten Beck found that state control over key ranking indicators had the expected result: countries literally “pushed” up the very metrics that the World Bank took into account. At the same time, other, no less important aspects of the business climate were ignored or even worsened, since they lacked resources. In the end, a country could move up in the ranking, but the real conditions for doing business did not improve, and sometimes became worse. The emphasis on measurable indicators made us forget about the real goal – creating a favorable environment for entrepreneurs.
How does Goodhart's Law explain the futility of blindly chasing KPIs?
These days, the vast majority of companies use KPIs (key performance indicators). The idea is to organize the work of a team to achieve specific, measurable goals that, in theory, contribute to revenue growth and business development. However, in practice, when KPIs become an end in themselves, rather than an indicator, chaos begins, and many indicators turn into “vanity metrics.”
This is what happened with the American bank Wells Fargo. The management set a tough KPI for managers — to increase the number of open client accounts. Employees, under pressure, did not think long about how to achieve the desired results and began to massively register additional accounts for existing clients without their knowledge. When reports on the impressive implementation of the plan were laid on the table, the management rejoiced for a while, but then the bank received thousands of complaints, a large-scale scandal and was forced to pay hundreds of millions of dollars in fines and compensation.
One of our banks (we will not write the name) launched a rapid activity in the same direction. It set a goal to increase the number of clients and strictly controlled the work of managers. The bank's card appeared among all friends, acquaintances, neighbors and relatives of employees. Aggressive advertising and imposition of services also bore fruit, and soon the goal was achieved. Everyone received bonuses and praise, and then it turned out that 90% of the issued cards were “dead” – no transactions were carried out with them. The bank wasted a lot of money on the issuance of plastic, salaries and bonuses, but did not receive any profit.
The Soviet Union seems to have broken all records in proving Goodhart's law. There was a joke about nails among the people. When the party set a plan for the factory to produce nails in kilograms, huge and heavy nails that were impossible to use came off the assembly line. And when the plan was set in pieces, mass production of tiny nails that looked like needles began. In both cases, the plan was fulfilled, but consumers needed ordinary nails of medium size. A similar situation was with coal, which was mined in record volumes, which, as it turned out, were not needed by anyone, and enormous resources were spent on it.
Instead of a summary
Any metrics are needed primarily for evaluation and analysis, not for blind control. Goodhart's Law demonstrates that the pursuit of one indicator almost always leads to victory… in achieving that indicator. But often this comes at the cost of destroying the overall system or losing the true purpose.
Does this mean that we should abandon performance monitoring? Not at all. The solution lies in a smarter approach to measurement. Instead of relying on a single metric, it is worth using a balanced scorecard (the so-called “basket of metrics”) that reflects different aspects of the activity. It is important to distinguish between intermediate indicators (number of calls, cards issued) and final results (profit, customer satisfaction).
The best strategy is to combine quantitative data with qualitative analysis. Instead of “selling” the public or management with beautiful numbers about imaginary achievements, it is worth focusing on the real quality of the product or service.
