The Cobra Effect

Always look for perverse incentives.

Setting goals improve performance - this is a scientific consensus. You probably implement them during your client engagements, and also for your own consulting practice. But there's a huge risk associated with goal-setting that we often brush aside or completely neglect: their unintended consequences.

These consequences can be grouped into three types:

  • Unexpected benefit: When the action or goal led to a positive side-effect.
  • Unexpected drawback: When the action or goal led to a negative side-effect.
  • Perverse incentive (also known as Cobra Effect): When the action or goal implemented to solve a problem ends up making the problem worse.

In yesterday's post we covered the first two, which are the good and bad unexpected side-effects of initiatives. Now, let's talk about the most dangerous unintended consequences that an action or goal can produce - also known as the Cobra Effect.

The Story Behind It

A perverse incentive happens when a proposed solution ends up worsening the problem it is trying to solve.

Many famous cases of perverse incentives are found in the introduction of new public policies or legislation, with economists or politicians failing to see the practical consequences of large-scale interventions. That's also the source of the term "Cobra Effect".

The story happened in India during British rule. The British government, concerned about the high number of venomous cobras in Delhi, offered a bounty for every dead cobra. When it started, it looked like this would work - large numbers of snakes were killed for the reward.

Eventually, however, poor people began to breed cobras to profit from the program. As soon as the government became aware of this, the initiative was discontinued. Can you guess what happened next?

Every single one of the cobra breeders found themselves with worthless snakes that needed to be fed. Since that was not profitable anymore, they set the snakes free. The wild cobra population ended up increasing.

There are many other examples of the cobra effect in action:

  • In building the first transcontinental railroad in the 1860s, the United States Congress agreed to pay the builders per mile of track laid. As a result, Union Pacific Railroad lengthened a section of the route forming a bow shape, unnecessarily adding miles of track.
  • Between 1945 and 1960, the federal Canadian government paid orphanages 70 cents per day, per orphan, and paid psychiatric hospitals $2.25 per day, per patient. Allegedly, up to 20,000 orphaned children were falsely certified as mentally ill so that the province of Quebec could receive the larger payment.
  • Funding fire departments by the number of fire calls that are made is intended to reward fire departments that do the most work. However, it may discourage them from fire-prevention activities, leading to an increase in actual fires.

Understand The Problem Before You Consider Solutions

Why did the Indian program (and the other mentioned examples) fail? I believe all of them oversimplified the problem, and ignored second-order effects that could arise from those incentives.

The goal of the bounty was not to increase the number of dead cobras but to reduce their overall population. Still, the program rewarded dead cobras. And the best way to continue to produce dead cobras is to raise them.

Paul Orlando, who writes extensively about unintended consequences, suggests several potential solutions to avoid the pervasive incentives:

  • Only pay for adult cobras, as determined by weight or length. Since cobras reach maturity between the age of four to six years, people would need to feed them for years before receiving payment. It would probably not be worth it.
  • Run the program for short periods of time, or end the bounty without notice. It takes the eggs 45-80 days to incubate. If the reward program only runs for a month at a time and starts and stops at unpredictable intervals, then there is no way to plan cobra production to take advantage of it.
  • Estimate the costs of raising cobras to maturity and set the bounty lower than that. When it only makes sense to kill wild cobras people will not bother to raise them.

As you see, most of the pervasive incentives can be significantly (if not completely) reduced just by better understanding the problem.

If you wonder what this has to do with your consulting practice, here's a quick exercise for you: You want to grow your business by winning more clients, and you need to choose one major goal or KPI to measure progress.

What are the pervasive incentives of adopting the following metrics?

  • Number of leads (name and contact information) who downloaded your ebook.
  • Number of emails sent or calls made to selected companies.
  • Number of online conversations through a chatbot.
  • Number of new sales calls scheduled.
  • Number of replies to RFPs.

Finally, if you could choose any metric, what would it be?
(If you're curious, here's my answer)

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