Columbia University recently skyrocketed from #18 to #2 on the US News college rankings.  They spent lots of time and energy understanding the ranking metrics and methodology and then, they, well…lied.

One of its own math professors confirmed as much.  Columbia claimed 96.5% full time faculty, real number more like 74%.  A 6:1 student to faculty ratio is really closer to 10:1.

Enter Goodhart’s Law, a positive sounding name with a benign observation that often results in bad outcomes or worse, unscrupulous behavior.

Any measure that becomes a target ceases to become a good measure.  

Columbia is not alone.  Other universities boost alumni participation by begging them to give tiny amounts or worse, increase their average SAT scores by paying freshman to retake it.  In fact, US News lists 69 schools that have admitted providing incorrect information and while some mistakes might be genuine, it’s funny how every instance improves their ranking.

This phenomenon plays out everywhere all the time.  Charlie Munger, #2 at Berkshire Hathaway, has his own spin on Goodhart, saying, “show me the incentive and I’ll show you the outcome.”

• Real estate brokers.  The commission structure incents brokers to close deals quickly rather than at the best price for the seller.  Not surprisingly, analysis shows that when realtors list their own homes, they sell at a higher premium than the clients they represent.
• Hourly billing.  Law firms routinely have to write off hours while trying to avoid saying what everyone knows – the hours were padded.
• In the 1970s Xerox salespeople were incentivized to push copier machines, even when leasing them would have been more beneficial for customers and more profitable for Xerox in the long run.

The Xerox example is reminiscent of a modern-day charitable sector Goodhart with F2F recruitment agencies acting as though the monthly amount is a free good.

Many (most?) agency pricing models are 12 or 13 times the monthly amount.  The fundraisers compensation is also partly tied to this incentive.  The problem?  Pressure to sign up for higher amounts has charities often paying more for donors who are more likely to quit.   Show me the incentive, I’ll show you the outcome.

Other examples:

• A study in the “International Journal of Nonprofit and Voluntary Sector Marketing” examined how donor preferences can drive fundraising strategies, leading charities to prioritize projects that are attractive to donors, rather than those that address the most pressing needs. Child sponsorship programs were cited as prime example.
• The “Nonprofit and Voluntary Sector Quarterly” found that organizations with lower fundraising ratios received more donations, often leading charities to underinvest in fundraising activities that could have generated more revenue in the long run.
• A “Nonprofit Management & Leadership” journal found the overemphasis on fundraising quantitative metrics can lead to neglecting qualitative aspects, such as building relationships with donors and understanding their motivations. This narrow focus hinders the development of sustainable fundraising strategies.

Have your measures and incentives become targets?  Good hearts can still produce Goodharts.

Kevin