Goodhart and Campbell’s Laws

You have probably seen the following scenario if you have worked in a corporate or research environment. A KPI or return was used as the objective within the organization and members of the organization “manipulated” their data or actions to reach the desired KPI or return.

This is an example of Goodhart’s Law, which is when a measurement becomes a goal, it no longer is a measurement.

Whenever a company uses a metric, such as rent to revenue or negotiated savings, they should be careful not to use the metric as the objective because it can corrupt the measurement. Negotiated savings is a way to measure how well a real estate department is negotiating in favorable markets. Once it becomes the objective, it can encourage actions, such as avoiding unfavorable markets or inflating the market prices, which can lead to bad outcomes.

In addition, the more such metrics are used, the more likely they are to corrupt the process they are used to measure. This is Campbell’s Law.

If a company only uses rent to revenue to evaluate its real estate decisions, there is an incentive for operators to start being more aggressive with their revenue projections in order to acquire expensive properties. This can lead to a result where the metric was acceptable, but what it was trying to measure, namely affordability of an acquisition, is unacceptable.