Introduction to the Cobra Effect
Announcer: You are listening to the Brainy Business podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here’s your host, Melina Palmer.
Melina Palmer: Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Have you ever made a decision that seemed like a perfect solution only to have it backfire spectacularly?
Perhaps a policy meant to pump up your team actually demotivated them, or a reward program encouraged all the wrong behaviors, or a cost-cutting measure saved some pennies, but at the expense of your best employees? If so, you’re not alone. That’s the power and danger of unintended consequences.
And in today’s episode, which originally aired in September of 2022, we’re exploring this phenomenon through one of my very favorite concepts called the Cobra Effect. And honestly, it’s one of those concepts that once you hear it, you start seeing it everywhere in organizations and government, even in your own day-to-day problem solving.
Considering how many people have been reaching out lately for help with change initiatives and team alignment—definitely around AI and other areas as well—I know this is something that’s really top of mind for a lot of companies right now. So it felt like the perfect time to bring this sneaky little concept back into the spotlight really quickly.
Before we get into the episode, I want to be sure you know that there are links in the show notes for my top related past episodes and books, ways to get in touch and more. It’s all within the app you’re listening to and at thebrainybusiness.com/559. Today’s episode is all about the Cobra Effect. Ready? Let’s get started.
Historical Examples: Cobras in Delhi and Rats in Hanoi
Melina Palmer: According to articles in Psychology Today and also an episode of Freakonomics and one by our friend Jennifer Clinehens on the Choice Hacking podcast—which are all linked for you in the show notes—back when the British ruled India, 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. A great idea in theory. Here is a win-win-win situation. People get paid to do this work for a lot less than I’m sure it would have cost the British to do this on their own. So they save money while cleaning up the streets and giving citizens a little extra cash.
What could possibly go wrong? It seemed to be working great at first. Skins were being turned out at amazing rates, and people were getting their payouts. But the cobra problem didn’t seem to be getting any better. If they were getting so many skins turned in, how were there still so many cobras in the city?
Well, it turns out a few people started their own cobra farms and were turning the skins in for profit. It was apparently much cheaper to run a cobra farm than what was being paid out in incentives by the British government. So this seemed like a great strategy.
When the British found out what was going on, they removed the bounty payout and canceled the program. Now that there’s no incentive to breed, kill, or turn in the skins, all those cobra farmers just set their cobras loose, which made the problem worse than ever.
While the effect got its namesake from this incident, it’s 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. Rats were coming up through the fancy new flush toilets in the posh French neighborhoods, which, in addition to being a terrifying prospect on its own, ended up spreading cases of bubonic plague to the European families.
Apparently, the numbers of rats were astronomical. What started as a couple hundred rats being pulled up out of the sewers per day became 7,400 rats on May 19, 1902. And at the high, June 12, 1902, there were 20,114 rats brought up and killed. That’s over 20,000 rats in a single day. What a nightmare.
So they put a bounty on rat tails. Similar to the cobra farmers of Delhi, rat farms popped up outside the city. And this is even easier than the cobras, because you only need to bring in the tail. You can remove that without having that messy business of killing a rat, which someone from the French side of things probably didn’t even think would be a possibility that would cross someone’s mind.
I mean, the citizens who are willing to catch a rat and cut off its tail must also want them gone for good, right? Aren’t we all trying to solve the unhygienic, scary rat problem? Apparently not. And 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.
Of course, I had to do some Google searching on this: two single rats can generate a population of 1,200 in a year, and the growth is exponential from there. Yikes.
Modern Missteps: Wild Pigs, Traffic Laws, and Orphanages
Melina Palmer: Sure, you might be thinking this is all a problem from back in the day, but in our modern society, we must have learned from those mistakes. Since our cities are no longer infested with cobras or having rats pop out of toilets on the regular, we’ve got this under control. Sadly, no.
In 2007, the wild pig population at Fort Benning, Georgia was so bad that they put a $40 bounty per tail. And you know how that story ends. In this case, though, there are apparently some local farms nearby, butchers and slaughterhouses, and some people reportedly came by and asked to just buy the tails for cheap so they could sell them back on post for a great profit.
Well, now you might be thinking, at least this is just a wild animal sort of thing, right? A pest control problem only. Well, you know where this is going. Our next example comes from Bogotá, Colombia, which tried to cut down on pollution and congestion on the roads in 2008 by limiting how often you can drive.
A worthy cause, of course. But the way they set this up was if your license plate ended in a 1, 2, 3 or 4, you’re not allowed to drive on Fridays. And if it ends in a 5, 6, 7 or 8, you can’t drive on Monday. There were strict penalties for black market plates, and so the people setting this up were able to see that very obvious loophole. There is still a market, of course, that exists, but most people didn’t end up going this way because, you know, they don’t want to break the law.
But if you need to drive every day, as most people do when they have jobs—because, you see, the rules didn’t limit the work weeks or the need to be somewhere—the hope, I guess, was people would carpool or take public transportation. But if you’re someone who can’t drive on Fridays, it’s not like you were able to work remotely or that schools were closed.
So what those people did who needed to get to their jobs is they bought second cars. And in dual-income families with people working in opposite directions or with schedules that didn’t coincide, some of them had four cars. This caused total congestion and driving to go up. Mexico City and Athens and other places apparently had the same problem with similar programs.
Often the second cars people were buying weren’t really nice energy-efficient cars, but older cars that were worse for the environment, making things again even worse than before the plan went into place.
In my research, I also found a story where the government of Quebec apparently gave considerably more money to mental health programs than to orphanages from 1940 to 1960. To try and help those orphaned children, there were some organizations who reportedly misdiagnosed many children with mental illnesses intentionally so that they would get more funding, which impacted about 20,000 people.
Other examples of the Cobra Effect include Prohibition in the US which increased and funded criminal activities, or ghost net collection to help clean up the ocean. What actually happened was people just vandalized good nets to turn in for rewards instead of fishing out old nets.
There was also a no-questions-asked $250 gun buyback program in Oakland, California that caused a huge debt for the police department because so many people were turning in cheap guns so they could use the money to buy better weapons.
The main lesson from the Cobra Effect is that no loophole goes unexploited. As the Psychology Today article includes in one of my favorite lines: “The road to hell is paved with good intentions and cobra skins.”
The Psychology of Incentives and Loopholes
Melina Palmer: 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. It doesn’t have to be nefarious or something that breaks the law.
Look at the example from Colombia and Mexico City. They bulked up on tracking for illegal black market license plates, but who would have thought that people would buy more cars to solve the problem? That shows the problem when there is a serious disconnect with the thing you are asking for and how practical it is. When a family is willing to have four cars for two people to get around your rule, something is wrong.
This is why it’s always so important to look beyond the surface solution and consider the problem you’re really solving. It’s important to get out of your own perspective and understand what someone really needs and what’s practical for them. You can’t just restrict one piece of the puzzle and assume the other pieces won’t move.
If you’re looking at your own problems, you really need to consider how your solution lines up with the real behavior of other people. You also have to get out of your own way and think about how someone might see this differently than you.
I’m guessing the idea of starting a cobra farm was so far from what anyone on that British team would have even considered. They never would have even thought of it. But to someone else in a different situation with a different background, it might be easy money.
Every decision has a reaction—not necessarily an equal or opposite one, but a reaction nonetheless. I’m linking to an episode in the show notes of a conversation I had with Walmart talking about their efforts to reduce plastic. Early on, they tried to thin their bags just a little bit to reduce plastic. When one in every million bags would rip because a box hit it just right, it caused a backfire where people would start to double bag. It snowballed to the point where they ended up using more plastic than before.
Michael Hallsworth spoke about this a bit when he was on the show in the “Do Nudges Work?” episode. Thinking about complex solutions and the way to think about problems—that’s just a fantastic conversation.
Strategies for Anticipating Backfires
Melina Palmer: Often the loopholes that are found by others are really obvious in hindsight. The problem is we tend to get so myopic when setting up the program. We’re so in the weeds that we don’t see what could happen.
There is a fascinating episode with Lee Caldwell discussing our power to imagine and how important that is for brands. That ability to be in the moment with someone else, to empathize and imagine, is so valuable for looking for exploitable loopholes.
If you’re considering implementing a payout, ask yourself these questions:
- Why are we paying this out?
- What is the perceived benefit for us?
- What’s the benefit for the person we’re asking to do this?
- Are we offering too much?
- If I wanted to scam the system, how might I do it?
- If I wanted to legally get around this, how could I do it?
I’m also linking to an episode about turning litter into lottery tickets, showing how incentivizing the chance to win makes it so people sort their garbage without any other payout.
I remember when I was working for an airline when I was 18, all the call center reps got a single dollar if you transferred someone to the preferred rental car company. Because our calls were monitored, you would think people would not scam the system for just a dollar. Yet there were people who would transfer every single person whether they wanted it or not just to collect the bounty.
Similarly in banking, you might get a better interest rate if you swipe your card 12 times a month. We had a surprising number of people who would go to a store and buy 12 single packs of gum, one after another, just to hit the transaction count. It definitely didn’t build loyalty and it was no longer a benefit for the bank.
So, yes, rules need to be put in place, but you also want to think further. Why are we doing this? What are we really trying to gain? Is there a better way to mutually benefit with the end users?
Spotting the Cobras in Your System
Melina Palmer: I want you to resist the temptation to toss in a bunch of incentives willy-nilly. Don’t just throw cash at any problem without thinking through the loopholes. Come up with at least 5 or 10 opportunities to see how you could break the thing that you’re building.
Since recording the original version of this episode, I’ve found myself spotting Cobra Effects everywhere. On a trip to Amsterdam, I saw those famously narrow canal houses. My guide explained that property tax used to be based on the width of the house’s frontage, so people built tall, deep homes with tiny street footprints. A classic Cobra Effect.
Then there’s the case of Pepsi. In the 90s, they jokingly included a Harrier fighter jet in a points promotion. John Leonard realized he could buy the points for less than the jet was worth and tried to claim it. It led to a massive lawsuit and a Netflix documentary.
Or think about Wells Fargo. Employees were pressured to hit account quotas and did so by opening millions of unauthorized accounts. That Cobra Effect tanked trust and cost billions.
The Cobra Effect isn’t confined to bad policies; it’s what happens when human behavior and incentives collide in ways we didn’t anticipate. This is why it’s important to have diverse teams in the room to spot these before they go live.
Where might a cobra be hiding in your own systems? What well-intentioned rule might actually be nudging people away from the outcome you really want? Come share it with me on social media or email me at melina@thebrainybusiness.com.
Join me next time for another brainy episode. Until then, thanks again for listening and learning with me—and remember to be thoughtful.
Announcer: Thank you for listening to the Brainy Business Podcast. Melina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.
