Grade inflation – a mark of human kindness

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Grade inflation, – as well as executive remuneration and audits, are the inevitable product of benign human nature, of pleasant social interactions and of self interested commercial ones. But some institutional structures invite grade inflation and others resist it.

Why has the grade point average of American college students, like English A-level scores, been rising? Why has executive remuneration outstripped the earnings of other employees? Why have audit standards been falling? The answer to all these questions is the same. Grade inflation occurs whenever one group of human beings is asked to comment on the performance of another.

The Lake Wobegon effect is named after Garrison Keillor’s mythical prairie town where all the children are above average. Most of us are good-natured and want to think well of our fellows. And it is good that it is so. Dedicated instructors sympathise with their students, effective boards support their chief executives, good accountants not only count the profits but make an effort to understand the business. I have never heard of a remuneration committee that thought its executives should be paid in the bottom quartile of the distribution. And I hope I never will: if that is their opinion they should pluck up courage to fire them. But no complex maths is required to see that if people are picking numbers that are, on average, above the average of everyone’s pick, that average will steadily increase.

The second component of grade inflation is Goodhart’s Law. When monetary targets became fashionable, economist Charles Goodhart observed that when an aggregate became a target its significance immediately changed. Any specific indicator adopted as a measure of performance will improve relative to overall performance. If hospital managers are encouraged to ensure that no one has to wait for more than six weeks, few people will wait for more than six weeks but a lot may wait for 41 days. If executive pay is related to EPS targets, earnings per share will tend to grow even if the long-term value of the business shrinks. Accountants will fit their reporting to generally accepted accounting principles. Students will focus on the particular skills on which they are measured.

So when people ask whether the performance of students has improved or the standards applied to them have declined, they pose a good question but a difficult one to pin down. Isaac Newton was a great physicist but he would have flunked A-level. There is so much he did not know. It is a tougher job to discover the laws of motion than to remember them, but it is perfectly sensible that today’s students are given the latter task rather than the former. When grandparents complain that young people cannot do long division, and grandchildren that old people do not know how to reboot the computer, both groups are right. People learn to do the things that are required of them, and so it is with examination performance. The only antidote to Goodhart’s Law is the balanced scorecard – use different indicators and change them frequently.

Grade inflation is also the product of competition. Competition improves performance and mostly this is good: it leads to lower prices and shorter queues at the checkout. But the process has perverse results when the product is performance measurement, and the buyer is the person whose performance is being measured.

If Professor Nice gives all his students As, and Professor Nasty gives all her students Cs, then students will prefer to enrol with Professor Nice. Not only does this increase the average grade, but it puts pressure on Professor Nasty to conform. Few executive remuneration consultants win business by being tough on the people who hire them. Only in the aftermath of Enron was objectivity a selling point for auditors. What customers want from examiners and advisers is the appearance of rigour but not the substance.

Grade inflation is the inevitable product of benign human nature, of pleasant social interactions and of self-interested commercial ones. But some institutional structures invite grade inflation and others resist it. Universities are lax examiners of their own students but tough examiners of school students. Privatised examination boards produced an improvement in scores, just as competition among auditors led to higher reported earnings. And the creation of remuneration committees produced an upward spiral in executive pay.

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