Goodhart's Law

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Goodhart's Law is a principle of using goals. His best-known formulation is "When a measure becomes a target, it ceases to be a good measure. When a measure becomes a target, it is no longer a good measure."

The principle is named after Charles Goodhart , an advisor to the Bank of England and professor at the London School of Economics and Political Science . His formulation of the principle was:

"As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends."

"As soon as a government tries to regulate certain financial assets, these become unusable as indicators of economic trends."

- Charles Goodhart : Problems of Monetary Management: The UK Experience

Investors try to invest in such a way that they benefit from the possible effects of regulating financial assets. As a result, the asset items influenced by this regulation can no longer be used as an indicator for economic trends. Goodhart first described this principle in the 1975 paper.

The principle has been known for a long time, however, and similar principles are known under other names, for example Campbell's Law (1976) or the Lucas Critique (1976). The principle is also implicitly reflected in the macroeconomic theory of rational expectation .

Although the principle arose in the context of the market , it can also be applied very well to the selection of goals in organizations.

Further formulations

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

"Every observed statistical key figure can only be used as long as no pressure is exerted on it."

- Charles Goodhart : Problems of Monetary Management: The UK Experience, 116

"A risk model breaks down when used for regulatory purposes."

"Every risk model loses its validity as soon as it is used for regulatory purposes."

- Daníelsson : Jon Daníelsson, 2002

Individual evidence

  1. ^ A b Charles AE Goodhart: Problems of Monetary Management: The UK Experience . In: Reserve Bank of Australia (ed.): Papers in Monetary Economics . tape 1 , 1975 (English).
  2. ^ Charles Goodhart: Problems of Monetary Management: The UK Experience . In: Anthony S. Courakis (Ed.): Inflation, Depression, and Economic Policy in the West . Rowman & Littlefield, 1981, pp. 111-146 (English).
  3. ^ Jon Daníelsson: The emperor has no clothes: Limits to risk modeling . In: Elsevier Science BV (Ed.): Journal of Banking and Finance . 2002, p. 1273–1296 (English, qed.econ.queensu.ca [PDF; accessed June 19, 2015]).

literature

  • K. Alec Chrystal, Paul D. Mizen: Goodhart's Law: Its Origins, Meaning and Implications for Monetary Policy . November 12, 2001 (English, cyberlibris.typepad.com [PDF; accessed June 19, 2015]).