Companies and governments usually have some form of assigned metric that they measure and try to move towards desired outcomes with a system of incentives, rewards and punishments. Goodhart Law questions the validity of measures becoming a target, as once it does because a target, then it ceased to be a good target.

This can be very complicated trap to avoid. The economist Charles Goodhart was referencing the adage he is known for about monetary policy, or another law linked to the same theme, which is Campbell’s law from the notable social scientist Donald Campbell about unintended consequences and cobra effects of public policy. There is also the Lucas critique from Robert Lucas who argues that you cannot predict changes in economic policy based on the relationship to historical data. This all dealt with public policy, but it can be very much true in the business world.

What we can learn from these laws or critiques that applies to business in that we have to think really hard about what to really measure and how we move towards trying to accomplish goals or tasks against that measure because it can lead to bad data or bad outcomes.

Bad data or bad outcomes in a sense that often people will apply a rational expectation of the model. Meaning that so long as they know the model that will learn how to game or manipulate it for their own benefit, which will always lead to bad data and bad outcomes. If you have a check the box task for an employee that is easily checked without having to go through the entire tasks, they will go for the easy check mark. If they learn how to use the systems to manipulate data to make them look good, then the data will be essentially useless to use.

One of the clearest examples that could be made about all these complicated measuring of metrics is the one of the typical sales goals. If the goal is to sell X number of units in a given time period, then the salesperson will go out of their way to sell the stated goal of X number of units, even if they have to sell the units at a loss. The measure target was accomplished but it lead to a poor outcome for the business. So, one must think very deeply and apply counter thoughts and scenarios on any incentives used to move the needle of a metric used to measure a goal. Because once measured, could ceased to be any good.