Chapter 5 Goodhart’s “Underappreciated” Law and Benchmarking

It is impressive when you have a law named after you, even if it is a somewhat obscure law. If you study finance you may not have come across Goodhart’s Law. However, it is increasingly relevant as computers help to create more indexes, investors benchmark their investments off the indexes, and this distorts market data and corporate valuations. Charles Goodhart is a British professor of economics at the London School of Economics. He has done extensive and distinguished work on regulation, banking and financial systems. He has served governments and published textbooks on monetary economics.

He wrote a paper in 1975, which among other things, discussed the consequences of monetary ...

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