The Source of Failure: We Optimize What We Measure
By Tyler Durden
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Rather than measure consumption and metrics that incentivize debt, what if we measure well-being and opportunities offered in our communities?
The problems we face cannot be fixed with policy tweaks and minor reforms. Yet policy tweaks and minor reforms are all we can manage when the pie is shrinking and every vested interest is fighting to maintain their share of the pie.
Our failure stems from a much deeper problem: we optimize what we measure. If we measure the wrong things, and focus on measuring process rather than outcome, we end up with precisely what we have now: a set of perverse incentives that encourage self-destructive behaviors and policies.
The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. If we measure “growth” in terms of GDP but not well-being, we lock in perverse incentives to boost 'growth” even at the cost of what really matters, i.e. well-being.
If we reward management with stock options, management has a perverse incentive to borrow money for stock buy-backs that push the share price higher, even if doing so is detrimental to the long-term health of the company.
Humans naturally optimize what is being measured and identified as important.
If students’ grades are based on attendance, attendance will be high. If doctors are told cholesterol levels are critical and the threshold of increased risk is 200, they will strive to lower their patients’ cholesterol level below 200.
If we accept that growth as measured by gross domestic product (GDP) is the measure of prosperity, politicians will pursue the goal of GDP expansion.
If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not.
If profits are identified as the key driver of managers’ bonuses, managers will endeavor to increase net profits by whatever means are available.
The problem with choosing what to measure is that the selection can generate counterproductive or even destructive incentives.
This is the result of humanity’s highly refined skill in assessing risk and return. All creatures have been selected over the eons to recognize the potential for a windfall that doesn’t require much work to reap.
When humans were hunter-gatherers—our natural state for hundreds of thousands of years, compared to roughly 5,000 years of agriculture—those on the lookout for a calorie-rich windfall that didn’t require a lot of work ate better (and had more offspring that survived) than those who failed to reap windfalls. In the natural world, such windfalls might be a tree heavy with ripe fruit or a beehive loaded with honey.
Calories were scarce, and work burns a lot of calories, so the ideal scenario for the hunter-gatherer is a windfall that can be harvested with a minimal investment of calories/effort.
In our economy, qualifying for a positive reward without investing too much effort is a windfall. As a result, whatever is measured sets up a built-in incentive to game the system (i.e. exploit short-cuts) or cheat …read more
Source: The Source of Failure: We Optimize What We Measure
