GOODHART’S LAW—ONE ENORMOUS NAIL. Andrew Haldane made a brief mention of Goodhart’s Law (page 19 of his speech), and John Kay in the Financial Times (September 12) says that the “the likely explanation of [Haldane’s] discovery that more complex rules are worse is to be found in Goodhart’s law.” Charles Goodhart formulated the law in connection with British monetary policy in the 1970’s. A rough way of expressing Goodhart’s Law is: once a social or economic indicator is made a target for the purpose of conducting social or economic policy, it will lose its value as a measure. This post from the Stubborn Mule blog has useful examples. Take a sales manager who observes that his best salesmen have the most meetings with customers. He creates incentives for the next sales year which reward increases in meetings with customers. The plan fails. The Stubborn Mule says: “According to Goodhartâ€™s Law, the very act of targeting a proxy (client meetings) to drive a desired outcome (sales performance) undermines the relationship between the proxy and the target.” (Think of salesmen gaming the system and overscheduling meetings with customers).
Other examples from the Stubborn Mule are an 18th century English tax on windows (people boarded up their windows) and the apocryphal soviet plan rewarding factories for the weight of nails produced (one factory is said to have produced a single enormous nail).