The Sharpe Ratio Broke Investors’ Brains

Goodhart’s Law: When a measure becomes a target, it ceases to be a good measure. The Sharpe ratio has changed investor behavior. We chase the metric rather than the underlying quality it is trying to assess, and there are plenty of situations where the Sharpe is a poor metric of quality. And there are unfortunately major losses, which keep on demonstrating the point - LTCM, AIG, Malachite...

Goodhart’s Law: When a measure becomes a target, it ceases to be a good measure.

The Sharpe ratio has changed investor behavior. We chase the metric rather than the underlying quality it is trying to assess, and there are plenty of situations where the Sharpe is a poor metric of quality.

And there are unfortunately major losses, which keep on demonstrating the point – LTCM, AIG, Malachite…

Credits to Richard Wiggins, CFA, CAIA at the Institutional Investor .

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