Cobra Effect Explained (Why Good Intentions May Backfire From Perverse Incentives)

When we want other people to do something for us, we sometimes may use incentives. However, an attempted solution may result in unintended consequences. The Cobra Effect, sometimes referred to as Perverse Incentives, refers to the unexpected adverse outcomes that can occur when a reward or incentive is provided as a solution to a problem.

The tale goes that many years ago when India had a severe cobra infestation around the city of Delhi. To resolve this issue, the government initiated a reward system for cobra skins. The lawmakers believe that by offering incentives for dead cobras, the public would help alleviate the issue of snake overpopulation. However, instead of capturing wild cobras and eliminating them, people began raising cobras for their skins from lots of new Cobra farms.

Soon, the government realised the existence of the cobra-farming industry cannot decrease the number of wild cobras, and then they terminated the program for those incentives. Since there were no more rewards to raise Cobras, the cobra farmers then released their raised snakes into the city, which exacerbated the Cobra infestation, making it even worse than before. The term "Cobra Effect" is derived from this story, which means that good intentions may backfire from perverse incentives.

Apart from the Cobra story, we may also see other examples related to this effect in our daily life. For example, in a city, the government was actively seeking a solution to decrease the elevated pollution levels primarily driven by excessive traffic. So, the lawmakers may have a simple goal: they aimed to reduce the volume of cars on the roads.

To realise this goal, the government may make a law to restrict individuals to only drive a few days during a week. This plan seems to be straightforward, however, a lot of families need to work everyday. Since they are not inclined to violate the law by engaging in any dubious activities, they have to buy more cars to satisfy their needs to drive every day. This generates more pollution and traffic congestion because there are more cars on the road.

Here is the question: How can we Avoid the Cobra Effect? Although we know what the Cobra Effect is, however, when we are dealing with rewards or incentives, and even penalties, it is very likely to encounter some variation of the Cobra Effect. One rule of thumb is to Keep incentives simple, because complex rules may have more loopholes. You can also consider yourself as a user of the incentive scheme and try to anticipate ways it might be manipulated. This can help adjust your program accordingly.