Difference between revisions of "Goodhart’s Law"
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== Definition == | == Definition == | ||
| − | '''Goodhart’s Law''' states that any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes | + | '''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 == | == Examples == | ||
* The case against [[Leverage Ratio | 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<ref>The dog and the frisbee, Andrew G Haldane, Vasileios Madouros, Economist, Bank of England, 2012</ref> | * The case against [[Leverage Ratio | 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<ref>The dog and the frisbee, Andrew G Haldane, Vasileios Madouros, Economist, Bank of England, 2012</ref> | ||
| + | |||
| + | == See Also == | ||
| + | * [[Risk Management One-Liners]] | ||
== References == | == References == | ||
Revision as of 10:46, 4 March 2024
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
