This document discusses Goodhart's Law and an example of how keeping the tuition discount rate flat can backfire for a university. The university initially kept the 30% discount rate flat but this resulted in a 10% increase in average net cost to students, more than the 5% inflation rate. As an alternative, the university discounted the inflation adjustment at 30% and additional tuition increases over inflation at 50%, resulting in a marginal discount rate of 40% and improved financial outcomes while modestly increasing the overall discount rate to 31%.

1. Managing to Discount
An Example of Goodhart’s Law
The Nation’s Largest Catholic University
Chicago, IL

2. Goodhart’s Law: Two Interpretations
• Any observed statistical regularity will tend to
collapse once pressure is placed upon it for
control purposes.
• When a measure becomes a target, it ceases to
be a good measure.

3. Assumed Goal: Keep Discount
Rate Flat
The Nation’s Largest Catholic University
Chicago, IL

4. An Exercise In Discount at College X
• Tuition is $40,000 per year
• Discount rate is 30%
• Net revenue per student is $28,000
• Inflation in next year is 5% ($42,000 expected)
• College X raises tuition 10% ($44,000)
• To keep discount flat, 30% of marginal $4,000 in
gross revenue should go to aid

5. An Exercise In Discount at College X
• But doing so results in an average net cost
increase of 10% (vs. 5% inflation): from $28,000
to $30,800. (Market would expect $29,400)
• But raising net cost 10% in a 5% inflation year
probably reduces enrollment and thus total
revenue
• A market driven Alternative: Discount the
inflation-adjustment ($2,000) 30%; discount the
excess over CPI ($2,000) 50%.

6. An Exercise In Discount at College X
• The Results of the Alternative:
– Marginal Discount = 40%
– Better position on the demand curve (although
admittedly still riskier than a pure CPI-based increase)
– Overall Discount = 31% (Up 1%)
– Revenue Per Student = $30,400 (Up 8.5%)
– Inflation up 5%
• You have increased discount and increased
average net revenue; total is subject to enrollment

7. An Exercise In Discount at College X
• The Results of the Alternative:
– Marginal Discount = 40%
– Better position on the demand curve (although
admittedly still riskier than a pure CPI-based increase)
– Overall Discount = 31% (Up 1%)
– Revenue Per Student = $30,400 (Up 8.5%)
– Inflation up 5%
• You have increased discount and increased
average net revenue; total is subject to enrollment