It is a basic principle in Economics that people respond to incentives!
As rational people make decisions after carrying out a cost benefit analysis they respond to incentives. However the question we face is,
“Are all incentives fruitful? Do these incentives always end with the desired outcomes? And what if our best laid plans go awry?”
That’s what we will be talking about today.
The COBRA EFFECT refers to the phenomenon wherein the policies aimed at addressing a problem rather magnify it by leading to some unintended consequences.
It is a type of perverse incentive.A perverse incentive is an incentive that has an unintended and undesirable effect which is opposite to the initial interests.
The term Cobra effect was first coined by German economist Horst Siebert and the idea dates back to the British era in India. During colonial India people were being killed by venomous cobras. To clamp down on this growing menace the British government offered a bounty on every dead snake. This proved to be a potent strategy at the initial stages where a large number of snakes were killed for a reward.
Problem solved?!? Or so the British thought!
Eventually the intrepid people began breeding cobras to seek the bounty. The officials, perplexed by the inconsistency between the number of cobras in the city and the number of dead cobras being redeemed for bounty payments discovered the clandestine breeding sites and realising their folly, scrapped the reward program. The breeders now left with no market for the nests of worthless snakes, set them free into the city exacerbating the original menace.
Thus, the term is often used to illustrate the causes of incorrect stimulation in the economy.A similar instance happened with the French who tried to eliminate rats plaguing Hanoi.This phenomenon finds its relevance even in the present scenario.
Present Scenario Relevance (E-commerce)
E-commerce firms usually equate unrealised value to lost value
i.e. the products added to the cart by a customer but not bought for a long time are considered a loss.
In the recent past these marketplaces offered heavy discounts on goods in the cart that were over a month old, notifying the customers for the same.
The idea behind initiating this action was to lure consumers interested in a particular product to make a purchase thus helping the company to improve its sales performance. This plan worked well until the consumers gauged the pattern. The problem that sprang up was that users who would have effected an immediate purchase at the regular price deliberately delayed their purchase to avail discounts. Thus the consumer behaviour was altered permanently.
This is yet another instance hinting at the ubiquitous nature of the cobra effect.
The problem crops up as a result of the incompetence of policy makers to gauge how a complex system consisting of multiple dependent variables will respond to a planned initiative.
The cobra effect is thus usually cited to emphasise that good intention alone does not necessarily translate into desirable results.These problems spring up when we only look at the direct consequences but fail to anticipate the indirect effects that work through our proposed incentives. It is also a result of our poorly established cause and effect relationships.
How we perceive connections between multiple variables influences our thoughts, our analysis of a problem and henceforth our recommended solutions. Often we tend to think only in terms of linear behaviour when it comes to cause and effect relationships- double the cause to double the effect, halve the cause to halve the effect. Identify the root cause of a problem and take action to eliminate it… problem solved.
But does that always happen?
We live in a highly connected world where an action can have multiple outcomes. When action is taken, the intended outcome might or might not occur, but a number of unexpected unwanted outcomes will definitely follow. To avoid this we need to have the foresight concerning the operation of cause and effect in complex systems.
Hence It is only when the realisation dawns on us that the world we operate in is often more complex than we realise can we come up with an appropriate remedy.
In the real world there are multiple factors interacting with each other. However we tend to think in terms of simple chains and linear effects.
Hence, developing methods to help understand cause-and-effect relations in complex systems is of great importance.
The need of the hour is to progress our imagination beyond the linear thinking.
Before taking an action we need to think deeply over the solution.
The bottom line is that simplistic policies can always backfire. So be ready. The next time you hear someone proclaiming a simple fix to a complex problem, check for the cobras lurking in the bushes!
WRITTEN BY:
NISHTHA GUPTA
Image Credits : Google Images
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