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What is behavioral economics? Why does it matter to you?

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Podcast Episodes

What is behavioral economics? Why does it matter to you?

220. Cobra Effect: No Loophole Goes Unexploited, a Behavioral Economics Foundations Episode

Today, we get to talk about a very fun concept known as the cobra effect or the cobra problem. It is something I included in my upcoming book, What Your Employees Need and Can’t Tell You, and I was very surprised at some of the early readers who work in the field and wrote comments like “WOW!” or called out this concept by name in their endorsement blurbs for the book.

As I have said on the show before, there are hundreds of concepts, biases and heuristics in behavioral economics and behavioral science that are impacting our actions every day – it is near impossible to keep up with all of them, and sometimes you find a little golden nugget like this one which can be a new discovery for people even when they are experts in the field. I’m definitely not saying that I am the first person to talk about it or that no one knows about it. Rather, when I realized that it might be a little more obscure than I thought, it became a clear contender for its own dedicated episode sooner than later – plus it is awesome and the story of how it got that name is really interesting. Wanna hear that story and how you can use the cobra effect in business? Listen in…

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SHOW NOTES:

    • [00:41] Today, we get to talk about a very fun concept known as the cobra effect or the cobra problem. It is something I included in my upcoming book, What Your Employees Need and Can’t Tell You.
    • [03:18] It all started way back when the British ruled India and the city of Delhi was infested with cobras. In order to help with the problem, the British set up a bounty and would pay anyone who brought in a cobra skin to help clean up the streets and keep people safe…but things didn’t work out quite as intended.
    • [04:45] And while the effect got its namesake from this cobra incident, it is by no means an isolated problem. Apparently, there was a very similar problem in Hanoi in 1902 when the French put in their sewer system, which essentially became a rat superhighway.
    • [06:21] Just like the cobras, when the French got wise of the scheme, they did away with the bounty and everyone let their rats go free creating an even worse (quickly multiplying) problem.
    • [07:49] Our next example comes from Bogota, Colombia, which tried to cut down on pollution and congestion on the roads in 2008 by limiting how often you could drive.
    • [09:42] In my research I also found a story where the government of Quebec gave considerably more money to mental health programs than to orphanages from 1940-1960. So, to try and help those orphaned children who otherwise would have had nowhere to go, the Catholic Church of Quebec reportedly misdiagnosed many children with mental illnesses to get more funding.
    • [11:10] The main lesson from the cobra effect is that “no loophole goes unexploited.” Incentives are great and they can absolutely work, but you need to be really thoughtful about what someone might do to benefit from whatever you are proposing. 
    • [12:16] It is always so important to look beyond the surface solution and consider the problem you are really solving before you move forward with a course of action. When you think about the problem, it is important to get out of your own perspective and understand what someone really needs and what is practical for them.
    • [13:58] You need to consider the problem you are trying to solve AND how it lines up with the real behavior of other people, as well as what they have control over and what you have control over in the new world you are proposing. Nudges and other tactics can only get you so far. You also have to really get out of your own way and think about how someone might see this differently than you.
    • [15:41] There are lots of valid and useful incentives and not everyone is going to take advantage of the loophole or even see it…but if the loophole is big enough and there are enough people willing to jump through it that can be a time where your solution makes the problem worse.
    • [17:42] Every decision has an impact – even the decision to do nothing – and changing one thing can change many things that are related even if you don’t think about them (and it isn’t always in a positive way).
    • [19:11] It is important to spend some more time thinking about those possible loopholes, and it is important to get into the mindset of the person who would be in the situation.
    • [19:49] The ability to be “in the moment” with someone else, to empathize and imagine we are part of that experience and show “How might we?” is so valuable and such an amazing skill. When you put yourself in that space, you can think differently, and that is really helpful when you are looking for exploitable loopholes.
    • [21:03] Melina shares questions you should ask if you are considering implementing a payout (use your free worksheet to follow along). 
    • [22:19] Even small incentives can cause people to look for loopholes and to find opportunities for their own benefit.
    • [25:38] Rules need to be put in place to adjust for possible loopholes. Maybe there are restrictions that need to go in place, but if there are too many restrictions, take a moment to consider if the plan is a good one or if it is time to go back to the drawing board.
    • [27:54] It is better to be thoughtful about these loopholes and restrictions up front instead of looking back after the fact and regretting the choices you could have made differently once you have the power of hindsight.
    [29:02] If you haven’t already, will you consider pre-ordering a copy of my upcoming book, What Your Employees Need and Can’t Tell You? In it, I talk about the cobra effect, and so many other important concepts from behavioral science and how they can be applied to business to help teams work and communicate better together.

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