The Cobra Effect

“As usual in human affairs, what determines behaviour are incentives…” — Charles T. Munger

The Cobra Effect happens when inadvertently, an attempted solution to a problem makes the problem worse.

The British Government, during its rule of India, offered a reward for every dead cobra as a way to curb the cobra population in Delhi.

This initially worked as many cobras were killed for the reward.

However, some enterprising Indians created farms to breed cobras to kill for the reward.

The British Government found out and stopped giving out the rewards.

These people noticing that their bred cobras were now worthless, set them free.

The cobra population further increased.

The Cobra Effect can occur in the corporate world when managers are focused on their incentives and bonuses without appreciating the bigger picture or intentions behind those bonuses.

For instance, the reason managers are rewarded for cutting costs is that it increases profits for the company, and more profits allow the company to grow.

The goal for the company is to maximize its profits to grow its business and not necessarily cut costs. Cutting costs happens to be one way of achieving that goal.

Should a manager not appreciate this and only focus on cutting costs for his/her bonus’ sake, there will be genuine profit-generating opportunities he/she will ignore because the initial costs involved would mean forgoing his/her bonus for that period.

The Cobra Effect comes into play here because these managers would end up doing things that are detrimental to their companies’ growth in the long run to get their bonuses in the short run.

This also means companies should ensure the bigger picture behind incentives is understood or incentives do not inadvertently bring about a Cobra Effect.

I will end with a recent example of the Cobra Effect I have come across in my work.

Some electric cables needed to be laid underground for a project.

It was agreed that the workers would be paid based on the distance they could cover in a day.

This incentivized the workers to continue working outside approved working hours and flout some safety rules leading to some safety infractions in a bid to cover more distance for more money.

The incentive/remuneration structure had inadvertently created some problems (Cobra Effect) and signaled that we needed to develop a different remuneration structure for these workers.