220. Cobra Effect: No Loophole Goes Unexploited, a Behavioral Economics Foundations Episode

Welcome to episode 220 of the Brainy Business Understanding the Psychology of why People Buy. Today's Behavioral Economics Foundation's episode is all about the Cobra Effect. Ready? Let's get started.

You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host. Host Melina Palmer hello.

Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today we get to talk about a very fun concept known as the Cobra Effect or the Cobra Problem. It's something I included in my upcoming book, what yout Employees need and Can't Tell youl. And I was very surprised at some of the early readers who wrote comments like wow. Or called out this concept by name as something they were amazed to learn about in their endorsement blurb for the book. As I've said on the show before, there are hundreds of concepts and biases and heuristics and behavioral economics and behavioral science that are impacting our behavior every day, and it's near impossible to keep up with all of them. And sometimes you find a little golden nugget like this one, which can be a new discovery for people even when they're experts in the field. I'm definitely not saying that I am the first person to talk about it or that no one knows about it, but when I realized that it might be a little more obscure than I thought, it became clear that it was a great contender for its own dedicated episode sooner than later. Plus, it's just awesome. And the story of how it got that name is really interesting. Which, with a name like the Cobra Effect, I'm guessing it isn't too surprising to you, right? Well, anyway, before we jump into the meat of the episode, I want to let you know that I'm going to mention a bunch of past episodes and articles and other related content throughout the show. But there's no need for you to take notes because I've already done that for you. The show notes are waiting for you, along with your free Cobra Effect worksheet within the app you're listening to and atthe brainy business.com220 okay, so let's jump right in with the Cobra Effect and how it got its name according to articles in Psychology Today. And also I've shared an episode of Freakonomics and one by our friend Jennifer Kleinhens on the Choice Hacking podcast, which are all linked for you in the show Notes Back when the British ruled India, the city of Delhi was infested with cobras. In order to help with the problem, the British set up a bounty and would pay anyone who brought in a cobra skin to help clean up the streets and keep people safe. A great idea in theory. Here is a win, win, win situation. People get paid to do this work for a lot less than I'm sure it would have cost the British to do this on their own. So they save money while cleaning up the streets and giving citize a little extra cash. What could possibly go wrong? It seemed to be working great at first. Skins were being turned out at amazing rates, and people were getting their payouts. But the cobra problem didn't seem to be getting any better. If they were getting so many skins turned in, how are there still so many cobras in the city? Well, it turns out a few people started their own cobra farms and were turning the skins in for profit. It was apparently much cheaper to run a cobra farm than what was being paid out in incentives by the British government. So this seemed like a great strategy. When the British found out what was going on, they removed the bounty payout and canceled the program. Now that there's no incentive to breed, kill, or turn in the skins, all those cobra farmers just set their cobras loose, which made the problem worse than ever. And while the effect got its namesake from this incident, it's by no means an isolated problem. Apparently, there was a very similar problem in Hanoi in 1902, when the French put in their sewer system, which essentially became a rat superhighway. Rats were coming up through the fancy new flush toilets in the posh French neighborhoods, which, in addition to being a terrifying prospect on its own, ended up spreading cases of bubonic plague to the European families. Apparently, the numbers of rats were astronomical. What started as a couple hundred rats being pulled up out of the sewers per day became 7,400 rats on May 19, 1902. And at the high June 12, 1902, there were 20,114 rats brought up and killed. That's over 20,000 rats in a single day. What a nightmare. So they put a bounty on rat tails similar to the cobra farmers of Delhi. Rat farms popped up outside the city. And this is even easier than the cobras because you only need to bring in the tail. You can remove that without having that messy business of killing a rat, which someone from the French side of things probably didn't even think would be a possibility that would cross someone's mind. I mean, the Citizens who are willing to catch a rat and cut off its tail must also want them gone for good, right? Aren't we all trying to solve the unhygienic, scary rat problem? Apparently not. And just like the cobras, when the French got wise of the scheme, they did away with the bounty and everyone let their rats go free, creating an even worse, quickly multiplying problem, apparently. Of course, I had to do some Google searching on this. Two single rats can generate a population of 1200, 150 in a year, and the growth is exponential from there. Yikes. Sure, you might be thinking this is all a problem from back in the day, but in our modern society, we must have learned from those mistakes. And since our cities are no longer infested with cobras or having rats pop out of toilets on the regular, we've got this under control. Sadly, not just. In 2007, the wild pig population at Fort Bennet running Georgia was so bad that they put a $40 bounty per tail. And you know how that story ends. In this case, though, there are apparently some local farms nearby, butchers and slaughterhouses, and some people reportedly came by and asked to just buy the tails for cheap so they could sell them back on post for a great profit. Well, now you might be thinking, at least this is just a wild animal sort of thing, right? A pest control problem only. Well, you know where this is going. Our next example comes from Bogota, Colombia, which tried to cut down on pollution and congestion on the roads in 2008 by limiting how often you can drive. A worthy cause, of course, but the way they set this up was if your license plate ended in a 1, 2, 3 or 4, you're not allowed to drive on Fridays. And if it ends in a 5, 6, 7 or 8, you can't drive on Monday. There were strict penalties for black market plates. And so the people setting this up were able to see that very obvious loophole. There is still a market, of course, that exists, but most people didn't end up going this way because, you know, they don't want to break the law. But if you need to drive every day, as most people do when they have jobs, because you see, the rules didn't limit the work weeks or the need to be somewhere as you would sort of expect to make this work. The hope, I guess, was people would carpool or take public transportation, but it didn't make it. So, you know, if you're someone who can't drive on Fridays, that you are able to work remotely on Fridays or anything along those lines, or that schools are closed or whatever. So what those people did who needed to have their jobs is that they bought second cars and in dual income families with people working in opposite directions or with schedules that didn't coincide, some of them have four cars. This caused total congestion and driving to go up. Mexico City and Athens and other places apparently had the same problem with similar programs that they put into place. And often the second cars people were buying, it's not like they were really nice energy efficient cars, but they were older cars that were worse for the environment, making things again even worse than before the plan went into place. In my research I also found a story where the government of Quebec apparently gave considerably more money to mental health programs than to orphanages from 1940 to 1960. So to try and help those orphan children who otherwise would have had nowhere to go or not had support, there were some organizations who reportedly misdiagnosed many children with mental illnesses intentionally so that they would get more funding which impacted about 20,000 people, 80% of which reported undergoing some sort of trauma between the formative years of 7 and 18 and half reported some sort of abuse during that time. The other examples of the Cobra effect include prohibition in the US which increased and funded criminal activities. Ghost net collection to help clean up the ocean. But what actually just caused people to just vandalize good nets to turn in for the rewards instead of fishing out old nets from the water? There was also a no questions asked $250 gun buyback program in Oakland, California that caused a huge debt for the police departments when so many people were turning in guns that they weren't expecting. And many instances of people that were trading in cheap guns so they could use the much more money from them to buy better weapons. And while there are many many more examples, I'm going to go ahead and leave it here for now because I think you're getting the point. The main lesson from the Cobra effect is that no loophole goes unexploited. And as the Psychology Today article includes in one of my favorite lines, right now the road to hell is paved with good intentions and Cobra skins. Incentives are great and they can absolutely work, but you need to be really thoughtful about what someone might do to benefit from whatever you are proposing. And it doesn't have to be nefarious or something that breaks the law. Look at that example from Colombia and Mexico City trying to reduce cars on the road. They bulked up on the tracking for the obviously illegal activity of black market license plate. But who would have thought that people would buy more cars to solve the problem. That really goes to show the problem. When there is a really serious disconnect with the thing you are asking for and how practical it is when a family is willing to have four cars for two people to get around your rule, something's wrong. This is why it's always so important to look beyond the surface solution and consider the problem you're really solving before you move forward with that solution. When you think about the problem, it's important to get out of your own perspective and understand what someone really needs and what's practical for them. Using the cars on the road as an example, it's possible that taking some time to pause and say how can we work with employers or schools to make it so they're on a similar four day week that might have made a difference. Those ripples matter. You can't just restrict one piece of the puzzle and assume the other pieces won't matter. If I'm going to lose my job if I don't show up on Mondays, but I can't drive my existing car on Monday and I have to drop off my kids at school and pick them up for times that don't make sense with taking the bus or maybe there aren't routes that get me there or they have activities after school I need to take them to on those days. I need a different solution. And it doesn't seem like this is too out of left field as far as problems go. You know what I mean? It's not like this is a one off extreme case where you have to let the outliers go. This is very likely a problem for 80% of the people out there. You know, how did they not plan for this? Full disclosure. Of course, I didn't speak with anyone who was part of that planning and I don't know what conversations they had or what was determined to be worth it or not. But it does seem like if you thought about this, it wouldn't have been proposed to move forward with the initiatives in the way that they went live. So for you, when you're looking at your own problems, you really need to consider the problem you're trying to solve and how it lines up with the real behavior of other people as well as what they have control over and what you have control over and what's outside of everyone's control in this new world that you're proposing. Nudges and other tactics can only take you so far. And it's important to look at those ripples, those connected items within the web to see where you might be able to find potential, potential outlying problems and how you can work them into whatever it is that you're recommending. You also have to really get out of your own way and think about how someone might see this differently than you. And in that way you need to consider people who are likely different than you. Look at the original cobra problem or the rat problem. I'm guessing the idea of starting a cobra farm was so far from what anyone on that British team would have even considered as something they would be willing to do, they never would have even thought of it as something to plan for. I mean, I don't know about you, but I'm not interested in farming plague ridden rats, venomous cobras, or any other pest for that matter. And I wouldn't think anyone else would want to either. So it doesn't seem like something that would be worth the bounty I'm willing to pay out. At least it doesn't feel that way to me. But to someone else in a different situation with a different background, it might be easy money. The tagline for the cobra effect again is that no loophole goes unexploited. And it isn't to say that all people are bad or all incentives are bad. That's not true. There are lots of valid and useful incentives and not everyone is going to take advantage of the loophole or even see it. But if the loophole is big enough and there are enough people willing to jump through it, that can be a time where your solution makes the problem worse. And it doesn't have to be a monetary incentive either. I know we talked a little bit about the cars and everything, but I'm linking to an episode in the show notes of a conversation I had with Walmart talking about their efforts to reduce plastic. So important and they're doing amazing things there. But early on they tried to thin their bags just a little bit to reduce the plastic. A tiny bit of every Walmart bag when they have such a large footprint becomes a big deal. And it's not enough to have a huge impact, but there was one in a very large number of bags that might have some sort of failure rate. And when one in every hundred thousand or million or however many bags it was would rip because a box or something hit it in just the right way, it caused a backfire where people would start to double bag and talk about it as if it was much more common than it was. And so more associates would all start double bagging and telling people about this potential problem and it just snowballed in a way that even small lightweight things might get put in doubled bags, or you would put less in every bag than you were doing before. A very natural response that people don't even necessarily realize that they're doing and they're not doing to be harming anything. It's that one little thing can't possibly hurt, but you end up with a higher use of plastic than before that initiative went into place. Again, really just important to look at what might happen, to think about those ripples before you move forward with any solution. So this isn't a full cobra effect with a loophole per se, but it is a similar type of effect and it can really help to showcase the sort of physics of all this. Every decision has a not necessarily equal or exactly opposite reaction, but you know what I mean, right? Even the decision to do nothing. Changing one thing can change many things that are related even if you don't think about them. And it isn't always in a positive way. Michael Hallsworth spoke about this a bit when he was on the show two weeks ago in the Do Nudges Work episode. In thinking about complex solutions and the types of testing that you're doing, the way to think about problems, that's just a fantastic conversation. And that episode has been getting way more downloads than the usual episode. It's a really interesting conversation. That and the Walmart episode are both linked for you in the show notes. So getting back to the basics here of the cobra effect, often the loopholes that are found by others are really obvious. In hindsight, of course, people set up cobra farms and reached out to farmers to buy pigtails. The problem is we tend to get so myopic when setting up the promotion or program. We're so in the weeds in our own heads about it that we don't see what could happen and don't think enough about the what ifs of the situation from varying perspectives to see how this could all unravel. Now, I don't want you to get so wrapped up in this that you never do anything, because that's not good either. But it is important to spend some more time thinking about those possible loopholes, and it's important to get into the mindset of the person who would be in the situation. There is a fascinating episode coming up in a few weeks with Lee Caldwell, which is discussing our power to imagine and how important that is for brands. Keep an eye out for the episode number 230 and if you aren't already subscribed to the brainy business. Take a moment now to hit that subscribe button so you can be sure to get it when that episode comes out in November. You'll hear more about it in the episode. But that ability to be in the moment with someone else, to empathize and imagine we're part of that experience and show how might we, is so valuable and such an amazing skill. When you put yourself in that space, you can think differently. And that is really, really helpful when you're looking for exploitable loopholes The British and French colonizers were in no state to be able to do this. They probably knew very little about the people they were providing incentives for, and it shows. But the incentives for pigtails and reducing driving or gun buyback programs, Those all might have had a different outcome if there were some visualization techniques or other time taken to think about what might happen in if I was this person in that situation and I made this much money, or I needed that, or I was incentivized in this way, instead of trying to analyze and overanalyze everything, I recommend you look at this process when you're thinking about putting any sort of cash incentive out there, at least as a place to start. If you're considering implementing a payout or you have something that's already got a payout, ask yourself these questions and be sure to get your free worksheet from the show notes@the brainybusiness.com 220 to help you with this. So you want to ask why are we paying this out? What is the perceived benefit for us? What's the benefit for the person we're asking to do this? Are we offering too much? What would it take for someone to get this money? Another way if I wanted to scam the system, how might I do it? Why might I need to get around this? Think about the cars on the road problem. If I wanted to legally get around this, how could I do it? Why aren't people doing this already? What would make people excited about doing it without paying? An incentive? I'm linking to one of my very favorite episodes on the literary, which shows about turning litter into lottery tickets and how incentivizing on everybody having this chance to win from the lottery makes it so people can throw away and properly sort their garbage without any other payout for everyone. So these aren't all the questions to ask, of course, but they are a good place to start as you consider your incentive plan. Even small incentives can cause people to look for loopholes and to find opportunities for Their own benefit. You know, it's funny, as I've been talking through this episode today, I've remembered a couple other examples that I've seen in my own career. I remember when I was working for for an airline when I was 18, all the call center reps got a dollar, a single dollar, if you transferred someone to the preferred rental car company that the airline had an agreement with. We were all trained to ask if the person on the phone was going to be needing a rental car. If they said yes, then you would offer to transfer them, which was a great benefit because they could get discounts as being referred from the airline. Win win, right? Seems easy enough. And because our calls were monitored, you would think that people would not want to scam the system. It's only a dollar each time, definitely not worth the risk. Yet there were a couple of people in our department who would transfer every single person on every call to the rental car company whether they wanted it or not. They didn't ask and would just collect their bounty. The airline would put out stats every month celebrating the top referrers and telling the rest of us to be more like them. But we all knew that they were notorious for sending people who didn't want to go there. And sometimes there would be people complaining about the call ending because someone would just transfer them along, even sometimes in the middle of a call because they wanted to get off the phone. Those people were getting an extra sometimes 300 or more on their check every month because of this. And it was just so. Similarly, in banking, in another example, it's pretty common to have incentives where you swipe your card a certain number of times and get some sort of benefit. In many cases, you would get a better rate on your money if you use the card 12 or 18 or however many times. We would likely not think that anyone would care enough to swipe the card for frivolous things just to scam that system. And the programs would be set up for any transaction even though it costs the financial institution money under a certain dollar amount. So it isn't worth that benefit. The thought is if someone uses their card more, you have a win win relationship. And people are going to want to be rewarded for that loyalty and feel this camaraderie of benefit of working together. You know the drill. But we had, and I know other financial institutions saw and have seen this still a lot too. You have a surprising amount of people, and to me, even one person taking the time to do this is surprising, but it was still a pretty reasonable number who would go every month to a grocery store, gas station or whatever and buy single packs of gum or mints or anything else, the cheapest thing they could find, one after another after another after another until they hit their 12 or 18 transactions of, you know, $0.30 cents each to qualify and they didn't use the card any other time during the month. It was just about getting that incentive. And whether it was proving a point or getting what they felt they were owed, it definitely didn't build loyalty. And it was no longer a benefit for the financial institution either. So yes, rules need to be put in place to adjust for things like that. You could have a minimum dollar amount on the transactions. But you also want to think further beyond just the rules and restrictions and blocking things out and take a moment to stop and ask yourself, why are we doing this? What are we really trying to gain? And is there a better way to mutually benefit with the end users? Maybe there are restrictions that need to go in place, but if there are too many restrictions, take a moment to consider if the plan is a good one or if it's time to go back to the drawing board and don't let a few bad eggs ruin it for everyone. Like I said in that instance at the airline, there were only a couple of people that did that. And if the airline had monitored a little bit more closely and really stopped that and didn't reward and make big deal about how amazing the people were that we all knew were gaming the system. And when you see that someone's getting 350 and everyone else is getting 12, maybe you assume that that outlier isn't just really good at sales and everyone else is bad at it. Maybe there's something else off there. All right, getting back to my point here on the COBRA effect, I'll kind of step off of whatever soapbox I got on there. I want you to resist the temptation to toss in a bunch of incentives, willy nilly. Incentives are so often thrown on top of a plan or program with the it can't hurt mentality. It feels like something that gives a little extra boost with no downside. As long as you know that you can afford the incentive, but know that it absolutely can hurt. Don't just throw cash incentives at any problem without thinking through all the loopholes and ripples and possible backfires and go beyond what you would be willing to do. Keep thinking. Come up with at least 5 or 10 or however many opportunities to see how you could break the thing that you're building. Think of the COBRAS Even though you're not willing to create a cobra farm, there may be people out there who are, and it's important to consider that. Know that it's always better to be thoughtful about these things up front instead of looking back after the fact and regretting the choices you could have made differently. Once you have the power of hindsight, remember again that road is paved with good intentions and Cobra skins. Now, before we close out the show, I want to remind you that there are links to related articles, others on the Cobra Effect, past episodes and books, and your freebie worksheet on the Cobra Effect all within the show. Notes for the episode which are waiting for you@the brainybusiness.com 22 that's going to give you an opportunity to check out my awesome artwork for the episode as well. I think it's really going to jump out on social media. If you haven't already seen it, please do go check it out and if you have, I'd love to hear your thoughts. You can find me as the Brainy Biz on Twitter, Instagram and Facebook, or share with me, Melina Palmer or the Brainy Business on LinkedIn to let me know what you think of my Cobra Effect artwork work. And just like that, episode 220 on the cobra Effect is done. Join me next week for another Brainy episode of the Brainy Business Podcast. It's going to be a lot of fun. You won't want to miss it. Until then, thanks again for listening and learning with me, and remember to be thoughtful.

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