The Cobra Effect: When Solutions Make Problems Worse.

oversimplified solutions and misaligned incentives across various fields, from urban planning, business problems, healthcare, and education can worsen the problem or may give birth to a whole new problem. This phenomenon is called The Cobra Effect.

The Cobra Effect is the term coined by German economist Horst Siebert which describes that the policy formulated to solve an issue can inadvertently worsen the situation. It traces its origin to the time of colonial India.

Origin of the Cobra Effect

In the early 1990s, during the British colonial rule in India, Britishers faced a major issue of cobra infestation. To tackle the problem the British government offered incentives and bounties to the locals on every dead cobra. While successful initially the policy backfired later as the locals started breeding more cobras to maximize their bounties. The administration pulled off all the bounties but the problem didn’t get resolved instead it only worsened. This phenomenon does have more rel life implications.

Implications of The Cobra Effect

1. Bogota: Fewer Cars, Less Pollution?

In Bogota, Colombia the government was in solution mode. The city was suffereing with high levels of pollution, caused by excess traffic. So the politicians had a idea - they would reduce the number of cars on the road.?

As bureaucrats are wont to do, they created a law to address the issue. It only allowed people to drive on certain days of the week. And to keep everything straight, the day you could drive was determined by the last two number on your license plate.?

That setup seemed pretty reasonable to the people in charge, but to lots of families, especially those where both parents worked, it was a problem.?

They needed to drive every day.?

But they were law abiding citizens, they didn’t want to break the law by doing something sketchy like buying an illegal license plate and switching it out. So they just found a legal loophole in the system - they bought more cars. Sometimes up to four for a single family. ?

The result was more pollution because there were now more cars on the road.

2. Wells Fargo: More Accounts, Happier Customers?

When a bank wants to make more money, what do they do? Getting existing customers to open more accounts is an easy way to improve their bottom line. And that’s exactly what American bank Wells Fargo?tried to do. They offered their employees incentives and created quotes for getting old customers to open new accounts.?

But with bonuses for management and punishments for others on the line, it was clear that this scheme was the perfect environment for the Cobra Effect to rear its head. ?

Many employees resorted to secretly opening accounts in customers’ names, forging signatures, and other unethical practices.?

This attempt to improve its bottom line created a customer experience, regulatory, and PR fiasco for Wells Fargo.

3. Miami Dolphins: Losing Team, Higher Draft Position?

In the NFL, the order in which a team can pick players in the annual draft is down to their performance in the previous season. That reward seems fair at face value, since teams with worse performance could hypothetically draft better players and improve.

But in 2021 the owner of the Miami Dolphins, Stephen Ross, was suspended for six games after allegedly encouraging the team to lose games on purpose so they could increase their draft position. Brian Flores, the former Dolphins head coach who blew the whistle even suggested that he was offered his own incentives - monetary bonuses - to throw games.?

When the NFL offered a reward in the form of a higher draft position to teams with low performance, they inadvertently fell victim to the Cobra Effect.

How to Tackle this issue?

Anytime in the future when you encounter any reward or incentive system even a punishment, you’re likely to run across the Cobra Effect in some form or fashion.

But if you are the person in charge that is you are the policy designer, it’s better if you avoid it.

Steven Levitt, economist, and Freakonomics co-author, suggests 2 solutions for the problem.

Create simple incentives:

The more complex and complicated the solutions policy is, the more easier it is to find loopholes. So try to make Simpler incentives.

Try to over-smart yourself:

Before you put a reward scheme in place, try to figure out a way to game it, then adjust your program accordingly.