Have you ever noticed how the moment you start obsessing over a number, the real goal somehow slips away?

A student who studies only to score 100 marks may stop learning. A salesperson chasing monthly targets may sell unsuitable products just to hit quotas. A fitness enthusiast obsessed with the weighing scale may lose muscle instead of becoming healthier.

The same phenomenon exists in investing.

Behavioural finance calls attention to many psychological biases that influence investment decisions. One of the lesser-known but incredibly powerful concepts is Goodhart's Law, which says:

"When a measure becomes a target, it ceases to be a good measure."

Although originally proposed by British economist Charles Goodhart in the 1970s, the principle has become increasingly relevant in today's data-driven investment world.

Whether you're evaluating companies, choosing mutual funds, or analysing your own portfolio, understanding Goodhart's Law can help you avoid some surprisingly expensive mistakes.

What is Goodhart's Law?

Every business uses metrics.

Revenue growth.
Customer acquisition.
Market share.
App downloads.
Assets under management (AUM).
Monthly active users.

These numbers exist for one reason—to measure business performance.

Problems begin when management starts optimising only to improve the metric instead of improving the underlying business.

Initially, the metric accurately reflects success.

Over time, however, people discover shortcuts that make the number look better without creating genuine value.

Eventually, the metric becomes misleading.

That's Goodhart's Law.

Why Investors Should Care

Modern investing has become heavily metric-driven.

Investors frequently compare companies using numbers like:

• Revenue growth
• EBITDA margins
• Gross Merchandise Value (GMV)
• Price-to-Earnings (P/E) ratio
• Return on Equity (ROE)
• Earnings Per Share (EPS)
• Customer growth
• Net Asset Value (NAV)
• Assets Under Management (AUM)

None of these metrics are bad.

In fact, they're essential.

The mistake is assuming one impressive number tells the whole story.

Great investing begins where headline metrics end.

The Paytm Story: When GMV Became the Goal

One of India's most discussed examples of Goodhart's Law unfolded before Paytm's 2021 IPO.

At the time, Paytm positioned itself as India's dominant digital payments platform.

One number kept appearing everywhere:

Gross Merchandise Value (GMV).

GMV measures the total value of transactions flowing through a platform.

A rising GMV suggests increasing scale and customer activity.

Naturally, investors loved seeing massive growth.

But what was driving that growth?

Cashback Fuelled the Metric

Between 2018 and 2019, Paytm aggressively incentivised users through cashback offers and discounts.

Marketing expenses reached approximately ₹3,400 crore in FY19.

Transaction volumes exploded.

GMV looked phenomenal.

Revenue from payments grew nearly 100% year-on-year.

To many investors, this appeared to confirm Paytm's market leadership.

But beneath the surface, something important was happening.

Customers weren't necessarily becoming loyal.

Many were simply following incentives.

The metric looked fantastic.

The economics didn't.

What Happened When Cashback Reduced?

As Paytm gradually cut promotional spending:

• Marketing expenses declined sharply
• GMV growth slowed
• Revenue growth dropped to around 12% in FY20 and roughly 10% in FY21
• Analysts increasingly questioned the company's path to profitability
• Several brokerages reduced target prices significantly
• Following its IPO, Paytm's stock experienced one of India's sharpest listing disappointments

The market eventually stopped rewarding GMV.

Instead, investors started asking better questions.

Can this business generate sustainable profits?

Can customers stay without incentives?

Can the economics survive?

These were always the questions that mattered.

GMV simply delayed them.

Goodhart's Law had played out almost perfectly.

Another Everyday Example: Social Media Followers

Imagine two influencers.

Influencer A has 5 million followers.

Influencer B has 500,000 followers.

Who is more valuable?

Most people immediately choose A.

But suppose:

• Influencer A bought followers.
• Engagement is extremely low.
• Brands receive poor conversions.

Meanwhile,

• Influencer B has highly engaged followers.
• Every sponsored post generates sales.
• Brands repeatedly work with them.

Which metric actually matters?

Followers were originally meant to indicate popularity.

Once everyone started chasing follower counts, fake followers, bots and engagement farms emerged.

Today, brands care much more about engagement rates and conversions.

The metric changed because people learned to game it.

Exactly what Goodhart's Law predicts.

Investing Makes the Same Mistake

Many investors unknowingly optimise for attractive-looking numbers.

Some common examples include:

Chasing the Highest Mutual Fund Returns

An equity fund delivering 35% returns last year naturally grabs attention.

Investors rush in.

But next year?

Performance may normalise.

Often, yesterday's winners become tomorrow's average performers.

Buying solely because of recent returns ignores:

• Portfolio risk
• Valuation levels
• Market cycle
• Investment strategy
• Consistency

Past returns measure history.

They don't guarantee the future.

Buying Stocks Only Because Revenue is Growing

High revenue growth sounds impressive.

But investors should also ask:

• Is the company making money?
• Are profits improving?
• Is customer acquisition becoming cheaper?
• Is cash flow positive?

Many startups can grow revenue rapidly simply by spending more on discounts.

Eventually, someone pays the bill.

Usually shareholders.

Obsessing Over Low P/E Ratios

A stock trading at a low P/E may appear cheap.

But low valuations sometimes reflect genuine business problems:

• Weak management
• Declining industry
• Poor capital allocation
• Falling earnings

Cheap isn't always attractive.

Sometimes it's simply cheap for a reason.

Goodhart's Law Also Applies to Individual Investors

This isn't just about companies.

Investors fall into the same behavioural trap.

Imagine someone decides:

"I want my portfolio to deliver 20% annual returns."

Soon, every investment decision revolves around achieving that number.

They begin:

• Buying speculative small-cap stocks
• Taking concentrated bets
• Ignoring diversification
• Using leverage
• Timing the market

The target becomes the return percentage.

The original objective—building long-term wealth safely—is forgotten.

Ironically, chasing higher returns often produces lower returns.

Warren Buffett Never Optimised for Short-Term Numbers

One reason legendary investors like Warren Buffett have consistently outperformed isn't because they chased impressive metrics.

Instead, Buffett focuses on questions like:

• Does the business have durable competitive advantages?
• Is management trustworthy?
• Can earnings compound for decades?
• Is the valuation reasonable?

Notice that none of these can be captured by a single number.

They're about business quality.

Metrics support the analysis.

They don't replace it.

How Goodhart's Law Shows Up in Mutual Fund Investing

Retail investors frequently rank mutual funds based on:

• 1-year return
• 3-year return
• Star ratings
• Recent rankings

These are useful starting points.

But choosing investments only because they topped last year's charts can backfire.

A better approach considers:

• Investment philosophy
• Risk-adjusted returns
• Portfolio concentration
• Expense ratio
• Fund manager consistency
• Performance across multiple market cycles

In investing, consistency often beats excitement.

Questions Every Investor Should Ask

Instead of stopping at attractive metrics, ask deeper questions.

When evaluating a company:

• What's driving this growth?
• Is the growth profitable?
• Can it continue without excessive spending?
• Does management allocate capital wisely?
• Are customers staying voluntarily?

When evaluating a mutual fund:

• How much risk generated these returns?
• Has performance remained consistent?
• Does the strategy match my goals?

These questions reveal far more than a headline number ever can.

The Behavioural Bias Behind Goodhart's Law

Why do investors fall into this trap?

Because our brains love shortcuts.

Psychologists call these mental heuristics.

A single impressive number feels easier to understand than analysing an entire business.

Media headlines reinforce this tendency:

• "Highest-return fund."
• "Fastest-growing startup."
• "Record profits."
• "Highest GMV."

The human brain naturally assumes bigger numbers mean better investments.

Reality is rarely that simple.

Practical Lessons for Investors

Before investing, remember these five principles:

1. Treat metrics as clues, not conclusions.

Every number should trigger more questions.

2. Understand what drives the metric.

Growth created by sustainable demand is very different from growth created through heavy incentives.

3. Focus on business quality.

Strong management, healthy cash flows and durable competitive advantages matter more than flashy numbers.

4. Think long term.

Temporary metrics often fluctuate.

Business quality compounds.

5. Ignore investment FOMO.

Just because everyone is talking about one impressive statistic doesn't mean it's the best investment opportunity.

The Bottom Line

Goodhart's Law reminds us that numbers don't lie—but they can certainly mislead.

The problem isn't using metrics.

The problem is confusing metrics with reality.

The Paytm example demonstrated how focusing on Gross Merchandise Value created an attractive narrative while masking deeper concerns about profitability and sustainability.

The same principle applies every day in investing.

The highest returns, fastest growth, lowest valuations or biggest assets under management rarely tell the complete story.

Successful investors dig deeper.

They ask why.

They seek sustainable value creation rather than eye-catching statistics.

Because in investing, just as in life, the best decisions come from understanding what truly matters—not simply what looks good on a dashboard.

Frequently Asked Questions

1. What is Goodhart's Law in simple terms?

Goodhart's Law states that when a metric becomes the primary target, it stops being a reliable measure of success because people begin optimising for the number rather than the real objective.

2. How does Goodhart's Law affect investing?

Investors may focus too much on metrics like revenue growth, past returns, P/E ratio or GMV without understanding the quality of the underlying business. This can lead to poor investment decisions.

3. Why is the Paytm IPO often linked to Goodhart's Law?

Before its IPO, Paytm highlighted rapid GMV growth, much of which was supported by heavy cashback spending. When incentives reduced, growth slowed, and investors shifted their attention to profitability and sustainable business fundamentals.

4. Can mutual fund investors also fall into this trap?

Yes. Many investors choose funds solely based on recent returns or star ratings instead of evaluating investment strategy, risk, consistency and long-term performance.

5. What metrics should investors look beyond?

Instead of relying on a single metric, investors should analyse cash flows, profitability, competitive advantages, management quality, debt levels, return on capital, valuation and long-term growth prospects.

6. What is the biggest lesson from Goodhart's Law?

Metrics should guide your analysis—not replace it. The best investments are built on sustainable value creation rather than impressive-looking numbers.

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