Who is Heisenberg?
Werner Heisenberg, a German theoretical physicist, was probably made more famous by the character Walter White in the HBO series Breaking Bad than by his breakthrough paper subsequently called the “Heisenberg Uncertainty Principle.”
There is nothing simple about quantum physics but, in its simplest terms, the Heisenberg’s Uncertainty Principle refers to the ‘observer effect’ as its basis. The observer effect is a phenomena that cannot be observed without the observer influencing the outcome.
Who is Goodhart?
In business there is a lesser known corollary called Goodhart’s Law, which formulates, “When a measure becomes a target, it ceases to be a good measure.”
Charles Goodhart was a financial advisor to the Bank of England and a professor at the London School of Economics. He published his paper on this formulation in 1975.
Measuring or Targeting?
The concept that, once a measurement becomes a target, that measurement is no longer valid, has huge implications for target and goal setting in organizations. For example, when test scores become the target for educational performance, the test ceases to be an accurate measure of performance. This is because the test becomes corrupted by the pressure on individuals to score high. In other words, at best, teachers will teach to the test. At worst, if the stakes are high enough, people will cheat to score higher.
High-stakes business-target incentives serve the same purpose and often with disastrous outcomes. Enron Corporation may be one of the more infamous examples. Enron’s incentives to achieve high profitability were extreme. Conversely, the incentive for poor performance was horrendous — job loss. The combination of a high financial incentive with an extreme disincentive for poor performance lead directly to an extreme manipulation of financial statements.
The Most Innovative Company in America – Enron
Ironically, prior to its bankruptcy, Enron was named “America’s Most Innovative Company” by Fortune magazine for six consecutive years in a row. We now know how innovative Enron truly was — it was all a shell game.
The list of high-profile examples can go on and on: MCI WorldCom, Bernie Madoff, Tyco, Arthur Anderson, etc.
But the unintended consequences of measurements becoming targets is evident in less important situations as well.
Most of us have experienced the unexpected disconnect from a customer service call after being placed on hold for a long period of time. This is a common practice in call centers called “double clicking.” The call center is measuring and trying to reduce “on hold” time and increase the number of customers served without additional personnel or equipment.
The call center agent, after completing a customer service call, hangs up and rapidly disconnects the next call. This effectively increases the number of calls answered and reduces the average “on hold” wait time. The only downside is you’ve just pissed off half of your customers who may have already been upset.
As with Walter White, aka Heisenberg, it is difficult to predict when the hero becomes the villain or when the measure becomes the target.