The Cobra Effect and its implications for incentive design

Why culture triumphs incentives in all walks of life

Jeff had his heads in hands as he crouched at his workstation. He led the Marketing team for the new digital product that StayFit Inc launched to nudge healthy habits in its consumer base. Lou, Jeff’s boss, peered through his glass cabin and noticed an exasperated Jeff and called him in.

Jeff explained how they had launched Cashback schemes for driving new customer acquisition but soon after onboarding, as the customer got the cash back, s/he tended to drop away. This meant they were burning cash as well as losing customers. Stickiness was low.

Lou understood and narrated the following story to Jeff -

This happened many decades ago when the imperialist East India company ruled Delhi. Venomous cobras had begun infesting in large numbers scaring the local population and causing a havoc in daily activities. An ingenious administrator devised a scheme to offer financial reward for anyone getting dead cobras.

Initially, the scheme seemed to work well as more and more dead cobras were brought in. But, after few weeks, the administration realized that entrepreneurs had begun to breed cobras in lure of the financial rewards.

Frustrated with this outcome, the scheme was halted immediately. With no reward to look forward to, the breeders released the bred cobras into the very lanes where they were supposed to pick it from.

The scheme had worked exactly in what it was intended to achieve - more dead cobras. When the scheme was stopped, the administration had more cobras and no cobra catchers!

Lou paused as he sensed a smile appearing on Jeff’s face.

This story tells us a lot about incentives we design in our lives - at home and at work. Every incentive drives a particular behavior and over time creates secondary behaviors that can have completely opposite effect than what the incentive was designed for.

Src - pexels.com

So, does this mean we do away with incentives altogether?

Incentives are necessary but….

Incentives are desirable as a nudge or an essential tactic to drive certain behaviors which, in turn, result in desirable outcomes. In fact, their success rate becomes a proxy for the target goal.

In that sense, whenever the target goal is hard to measure, efficacy of incentives is a replacement metric. In the cobras example, number of dead cobras was an excellent indicator that the cobra population is dipping and likely will reduce the menace.

But does it always work? Take for example, a dinner table challenge that every parent faces. Eating greens is undesirable for kids as opposed to sweets or bread. As a parent we try everything till we relent and incentivize eating greens by offering sweets or TV or favorite toy. When the kid grows up, what will she seek? This brings us to the next point.

… Incentives are extrinsic, not intrinsic…

The goal was to reduce cobras by incentivizing their killing. The hope was that incentives will create a pattern in which cobra catchers and in general, the local population eliminates cobras as a practice. But, intrinsically, cobras are not treated as enemies by the Indian culture and so the incentive never influenced the larger population. Instead, the incentive delivered exactly what it targeted – more dead cobras by more breeding.

If only the colonialists had a way to accurately track the total number of cobras and thereby the trend of dead cobras, they would have sensed this incongruent outcome.

Incentives are excellent motivators, but horrible in building long term behaviors. They are extrinsic tools aiming to build intrinsic behaviors.

Back to our dinner table battles – if the kid internalizes the need to eat greens, it will choose to eat greens rather than be tricked in eating them. Offering a candy or TV will never result in internalizing healthy diet. In fact, kid will throw more tantrums to get more candies or better candies to eat the greens. So, then how do we build the intrinsic behavior? This brings us to the last point.

Culture is the best way to build intrinsic behaviors

If the kid sees a culture of healthy lifestyle at home -  be it nutrition, exercise, rest, it will naturally tilt towards eating healthy food. It will choose greens for dinner because she sees her family practicing good food habits. Over time, as she explores, she will learn to choose healthy food items beyond the greens. Furthermore, her lifestyle will seek healthy options in nutrition, exercise and rest.

Culture eats strategy for breakfast - Peter Drucker

Culture is the best way to drive intrinsic behaviors and reduces not just the need for incentives but also curtails the risk of incentives driving errant outcomes.

Additionally, culture creates an environment to look at things holistically and in the long term. For example, we can look at the Cobra problem differently, we can start by asking why were there more cobras? Was it because there were too many rats? If so, why were there too many rats - was it because there was too much filth? If so, then the problem was a culture of cleanliness and tidiness that would avoid rats and therefore not create the situation for cobras to grow.

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While designing incentives, the focus is always on the near-term goal. It is impossible to extrapolate the impact of incentives in creating second-order behaviors ( like breeding cobras to kill them for rewards ). Besides, incentive adoption evolves as it plays out in a complex environment of social, political and economic factors.

The Cobra effect reminds us of focusing on using the culture as the primary goal for driving any behavior. But building culture takes decades, can the quarterly rigmarole of financial results bear with such a long time ? Maybe the stock market incentive itself needs a relook!