Cobra Effect: When Good Incentives Bring Bad Results

The cobra effect — otherwise known as the perverse incentive — describes an incentive structure with undesirable results. The effects of the incentive are unexpected and contrary to the intention of its designer. The name comes from economist Horst Siebert. The British government was concerned about the number of venomous cobras in Delhi. They offered a bounty for every dead cobra. Initially, the strategy worked: large numbers of snakes were killed for the reward. Eventually, however, people began breeding cobras for the income. When the government became aware of this, the program was scrapped. Everyone who bred cobras set their snakes free, and, in the end, the cobra population skyrocketed.

Perverse incentive structures are present in many contemporary systems. For example, when voters rank a candidate higher, they might lose an election. In 2002, British officials wanted to suppress opium production in Afghanistan. Poppy farmers were offered 700 dollars per acre of destroyed crop. This ignited a poppy-growing frenzy among farmers, who sought to plant as many poppies as possible so that they could then destroy them and collect payouts. Many farms harvested and sold the poppies before destroying the plants.

Basically, when an intervention creates incentives that result in unexpected behaviors, we call that the cobra effect. Bounty programs backfire because people start exploiting the system for personal gain. Policies designed to curb an issue inadvertently encourage the behavior they intended to reduce. Actions taken to solve a problem trigger responses that feed back into the system. Economic and environmental policies produce ripple effects that complicate the end result. In five words: they bred even more cobras.

Real-world instances of the cobra effect:

• Cobra Bounty: in colonial India, the British government offered a bounty for every dead cobra. People began breeding cobras to kill them for the reward. When the government halted the rewards, the bred cobras were released, resulting a surge in their population.

• Environmental Policy: a government offered subsidies for installing energy-efficient appliances in homes to reduce energy consumption. Households started using these appliances more frequently, negating any savings in energy because of increased consumption — something also known as the rebound effect.

• Healthcare: an insurance company reduced premiums for policyholders who had regular health check-ups. Some individuals engage in riskier behavior when they feel protected by their insurance, resulting in higher overall costs and worse public health.

• Tax Incentives: a city introduced tax breaks for businesses that relocated to a particular area for economic growth. Too many businesses clustered in the area. Congestion and increased competition for local resources ensued. There was a sharp decline in the quality of life. Any economic benefit was zeroed out.

How you might use the cobra effect as a mental model: (1) anticipate the unexpected — when designing strategies, think how your incentives might be exploited in a way that worsens the problem; (2) pilot test — implement the program and monitor it to see how well it worked, being prepared to adjust or terminate the program if the data indicates the solution to be counterproductive; (3) design lasting incentives — structure incentives in a way that minimizes abuse-vulnerable loopholes, aligning them with long-term goals rather than short-term fixes; (4) consider the system — recognize that interventions in complex systems can trigger unexpected second-order consequences.