Goodhart’s Law
From Open Risk Manual
Revision as of 10:46, 4 March 2024 by Wiki admin (talk | contribs)
Definition
Goodhart’s Law states that any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes. Alternative expression: When a measure becomes a target, it ceases to be a good measure.
Implications
The fitness of risk models for control purposes may be compromised, i.e., no risk model can take account ex-ante of the ways in which it might be gamed by involved parties.
Examples
- The case against leverage ratios is that they may encourage banks to increase their risk per unit of assets, reducing their usefulness as an indicator of bank failure[1]
See Also
References
- ↑ The dog and the frisbee, Andrew G Haldane, Vasileios Madouros, Economist, Bank of England, 2012