The story goes that many years ago, in colonial India, there was a cobra infestation in the city of Delhi. So the British created a bounty for cobra skins. They thought by offering a reward for dead cobras, the public would solve the snake overpopulation problem.
But instead of capturing feral cobras and killing them, people started farming cobras for their skins.
The British eventually got wise to the cobra-farming industry, and canceled the bounty. But with no bounties to collect, the cobra farmers set their snakes free in the city — making the infestation even worse than before.
It’s from this (likely ahistorical) story that the so-called Cobra Effect gets its name.
What is the Cobra Effect?
The Cobra Effect, also called Perverse Incentives, describes unintended negative consequences when a reward or incentive is offered to solve a problem.
Coined by German economist Horst Siebert, the Cobra Effect can ruin the best laid plans of bureaucrats and business people. For example:
1. Bogota: Fewer Cars, Less Pollution?
In Bogota, Colombia the government wanted to reduce pollution caused by excess traffic. So, they created a law that only allowed people to drive on certain days of the week, determined by the last two numbers on their license plate.
But lots of families, especially those where both parent worked, needed to drive every day. Instead of buying an illegal license plate and switching it out every day, people solved their issue in a totally legal way: they just bought more cars — sometimes up to four for a single family.
The result? More pollution, and more cars on the road.
2. Wells Fargo: More Accounts, Happier Customers?
American bank Wells Fargo offered its employees incentives and created quotas for getting customers to open new accounts. But many employees resorted to secretly opening accounts in customers’ names and other unethical practices.
This attempt to improve its bottom line created a customer experience, regulatory, and PR fiasco for Wells Fargo.
Airplane manufacturer Airbus wanted to improve the flying experience on its planes by reducing noise in its cabins.
But once the noise was removed, Airbus realized that the cabin noise was covering up lots of unwanted sounds — like babies crying and toilets flushing. Its attempt to improve flying actually made the experience worse.
The Bottom Line: How to Avoid the Cobra Effect
If you work in marketing, business, or design, you’re likely to run across the Cobra Effect. To avoid it, here’s Economist Steven Levitt’s advice:
Create simple incentives. The more complicated you make a scheme, the easier it is to find loopholes.
Try to outsmart yourself. Before you put a reward scheme in place, try and figure out a way to game it, then adjust your program accordingly.
You may not be able to avoid Perverse Incentives completely, but being aware is the first step to avoiding them.