Goodhart's law

Goodhart's law is named after economist Charles Goodhart, paraphrasing: "When a measure becomes a target, it ceases to be a good measure."

The original formulation by Goodhart is this: "As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends." This is because investors try to anticipate what the effect of the regulation will be, and invest so as to benefit from it. Goodhart first used it in a 1975 paper, and it later became used popularly to criticize the United Kingdom government of Margaret Thatcher for trying to conduct monetary policy on the basis of targets for broad and narrow money. However, the concept is considerably older, and closely related ideas are known under different names, e.g. Campbell's law (1976), and the Lucas critique (1976). The law is implicit in the economic idea of rational expectations. While it originated in the context of market responses, the law has profound implications for the selection of high-level targets in organizations.[1]

Expressions

Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.

Goodhart's original 1975 formulation, reprinted on page 116 in Goodhart 1981[2]

A risk model breaks down when used for regulatory purposes.

Daníelsson formally labels this a corollary of Goodhart's Law.[3]

All metrics of scientific evaluation are bound to be abused. Goodhart’s law (named after the British economist who may have been the first to announce it) states that when a feature of the economy is picked as an indicator of the economy, then it inexorably ceases to function as that indicator because people start to game it.

Mario Biagioli[4]

See also

References

  1. ↑ Goodhart, C.A.E. (1975). "Problems of Monetary Management: The U.K. Experience". Papers in Monetary Economics. Reserve Bank of Australia. I.
  2. ↑ Goodhart, Charles (1981). "Problems of Monetary Management: The U.K. Experience". Anthony S. Courakis (ed.), Inflation, Depression, and Economic Policy in the West. Rowman & Littlefield: 111–146.
  3. ↑ Daníelsson, Jón (July 2002). "The Emperor Has No Clothes: Limits to Risk Modelling". Journal of Banking & Finance. 26 (7): 1273–96. doi:10.1016/S0378-4266(02)00263-7. – via ScienceDirect (Subscription required.)
  4. ↑ Biagioli, Mario (12 July 2016). "Watch out for cheats in citation game". Nature. 535 (7611): 201. doi:10.1038/535201a.

Further reading

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