Saturday Serendipity
Quote's, Mental Model, Interesting find.
Hi.
Reading time: About 4 minutes
Quote’s
Shane Parrish on inaction.
"When you know what needs to be done, inaction increases stress. You feel a lot less stress when you do the things within your control that move you closer to your objective. Action reduces stress." - Farnam Street
Charlie Munger on rationality.
“I like understanding what works and what doesn’t in human systems. To me that’s not optional; that’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational.” —Charlie Munger
Mental Models
Goodhart’s Law
If I give you one goal to increase the sales of a brokerage firm in one year. What will you do?
Many people would choose to incentivise the employees in the brokerage firm by giving them a compensation based on how many stocks they sell in a month. Now if you do this you would notice your sales go up dramatically.
But you will also realise that the employees are selling people fake dreams and as a company you fail to deliver long term value as the people who trusted you don’t anymore.
You changed the priority of the employees from serving the consumers to serving themselves.
This is an unintended consequence very similar to the cobra story.
Goodhart’s Law states that,
“when a measure becomes a target, it ceases to be a good measure.”
When we specify one particular measure than we focus only on achieving that as our target and this leads to unintended consequences. This is the basic idea of the Goodhart Law.
This law can be seen everywhere and is a perfect example of how not to set incentives.
Sales targets: Many companies give their salespeople sales targets. If they achieve those they get a fat pay check. The more salesmen try to sell the more discounts and offers they come up with hampering the businesses profits.
School: Our education system is set up in a way where every single person is focused on one thing. Grades. Now the schools want the children to get better grades but this comes at the cost of the main objective of the school, learning. Some would argue higher grades correlates with the level of learning. But from my experience it hasn’t worked like that. I just do whatever is required to get the grades I want and it does not matter if I understand what I am learning.
Politicians: Politics works on one thing self-interest. Most of them care about their public perception over doing actual work as having a good public perception is what is going to get them the votes.
Hospitals: Many hospitals measure their success rate by checking how many patients who get admitted end up dying. This is not the right measure as it can easily be manipulated. Hospitals simply won’t take in patients who have high probability of dying.
Sports: If as a coach I give the players a target of achieving a particular total it could turn fatal. For example, I can tell everyone in my team to play the 20 overs out but it might go against their natural game in essence affecting the team.
Model thinkers wrote,
“Type of Goodhart’s Law
Regressive
Choosing a measurement that is a single proxy to your goal, when the goal actually has several causal factors behind it.
Knowing that successful basketballers tend to be tall, you might build a basketball team by recruiting tall people. However, they might not possess other factors such as coordination, fitness, quick responses etc..
Extremal
Where a proxy might indicate the goal under normal circumstances, but not in variable contexts.
Sugar consumption helped define our ancient ancestors’ survival however today, with a different context, our excessive sugar consumption is often an indicator of an unhealthy diet.
Causal
Confusing Causation vs Correlation when selecting measurements.
Data might indicate increasing ice cream sales when people wear sunglasses. However, providing more sunglasses won’t necessarily boost ice cream sales because they are both caused by a third factor, ie. sunny, hot days.
Adversarial (Cobra Effect)
Choosing a proxy measurement incentivises people to make the proxy the new goal.
Adversarial aligns with the Cobra Effect, a term stemming from British-ruled India when, as the story goes, a local government body offered a bounty on cobras to reduce their population. Unfortunately, this led to people breeding more cobras for the bounty.”
Antidote
Well in my opinion the best way to avoid Goodhart’s law is to apply other mental models.
One that I can think of is second order thinking. Keep asking and then what? You might realise that it is a mistake.
One more thing you can do is set more measures as targets and not only one. You can for instance incentivise the salesmen to sell more and at the same time ensure a certain margin. Or you could make them have the owner’s mindset.
Interesting find
That’s it.
Enjoy your weekend.
Thank you for reading,
Samvit.