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The Cobra Effect: No Loophole Goes Unexploited

When rewards for prosocial behavior are co-opted by fraud.

Key points

  • The Cobra Effect refers to the unintended negative consequences of an incentive that was designed to improve society or individual well-being.
  • The term derives from an attempt to eradicate snakes in India, wherein people bred cobras to collect rewards for their capture.
  • Examples of this effect in the US include gun buyback programs and, more recently, a specific attempt to control the spread of COVID-19.

The Cobra Effect describes the unintended consequences and perverse outcomes that can occur when organizations or governments offer rewards, bounties, or incentives to encourage people to take some specific, pro-social action.

Such programs can sometimes tempt unscrupulous individuals to find and exploit flaws or weaknesses that will allow them to claim the reward through fraud or deceit. When the program is overrun by such corruption, it collapses into failure, sometimes leaving matters worse than before any incentives were offered.

Economist Horst Siebert coined the term “cobra effect” based on the following: When the British ruled India, the city of Delhi was infested with cobras. To enlist the public’s help in eradicating the snakes, officials offered a bounty on cobra skins. Soon, however, a cottage industry of cobra farming sprang up. People were breeding them for their skins. The British paid out more and more money, but the cobra infestation did not abate. And cobra farming only added to the problem. When authorities finally got wise to the scam and withdrew the bounty, the farmers set their now-worthless cobras free. In this case, truly the road to hell was paved with good intentions – and cobra skins.

The Cobra Effect and COVID-19

This week Brigham Young University issued the following warning: “Students who…have intentionally exposed themselves or others to [Covid-19] will be immediately suspended from the university and may be permanently dismissed." BYU apparently received credible information that some students were trying to become infected in order to score a bigger paycheck when donating plasma.

Healthy individuals are paid $50 per visit by a plasma donation center near the BYU campus. However, the same donation center offers $100 per visit for those with Covid-19 “convalescent plasma.” Like entrepreneurs seeking to capitalize on a niche market, some students may have seen Covid-19 as an opportunity to apply what they learned in Economics 101 about supply and demand.

A Gun Buyback Program Goes Awry

In 2008 the police in Oakland, California conducted a gun buy-back program. Presumably, the goal was to reduce criminals’ easy access to firearms. Anyone could turn in a firearm and walk away with $250, no questions asked.

A newspaper account called the buy-back program “a poorly organized fiasco.” (This raises the question: What distinguishes a poorly organized fiasco from a fiasco that has been well-organized? I assume that an incompetent fiasco would be worthy of contempt, whereas a skillfully managed fiasco would merit grudging respect. But that is an ontological question beyond the scope of this post.) What could have gone so wrong with the buy-back? Let us count the ways:

  • “The first two people in line at one of the three buyback locations were gun dealers with 60 firearms packed in the trunk of their cars.”
  • They “bought a dozen guns from seniors living in an assisted-living facility.”
  • Rather than getting guns off the streets, some less-than-trustworthy individuals were turning in their cheap weapons and using the $250 bounty to buy a better gun.
  • So many people rushed to turn in guns that the police department ran out of money and had to give IOUs, leaving the department with a $170,000 debt.

With the recent Paycheck Protection Program, Congress set up a program whose flawed execution allowed grifters to obtain millions of dollars to meet payroll expenses, when there were few if any employees and scarcely any payroll to meet. (Examples here, here, and here.)

How to Avoid the Cobra Effect

Anticipating and avoiding perverse outcomes and unintended consequences requires the ability to apply second-order thinking skills to planning and problem-solving. First-order thinking is linear and simplistic: How do we get rid of the cobras? Let’s offer a bounty to people for killing them. Second-order thinking is:

  • Analytical. The who, what, when, where, why, and how of the project, its planning, and its execution.
  • Critical. What are our assumptions, what could go wrong, how could external influences affect our plans and the outcome, and on what evidence are we confident in our plans and assumptions?
  • Skeptical. What can go wrong and how, what is the probability of that happening, and what unintended consequences or perverse outcomes might ensue?

For more examples, see The Cobra Effect: Good Intentions, Perverse Outcomes.

“Learn from the mistakes of others. You can never live long enough to make them all yourself.” —Groucho Marx

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