Goodhart’s Law

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.

Similarly, if an economic indicator or index becomes a target for conducting social or economic policy, it will lose the information qualities that qualify it to play such a role in the first place.

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

See Also

• Risk Management One-Liners