BY HRITIK SINGHAL & DEEKSHA GUPTA
Right from birth, we start to see connections in the world around us. A meal cures hunger; sleep relieves tiredness; problems have causes, and eliminating the cause will yield a solution. But the first thing that comes to your mind is not always right.
The term ‘Cobra effect’ was coined by Horst Siebert, a German economist and professor, based on an incident in India during the British colonial rule. This famous anecdote describes a scheme during the British Raj when Indian subjects were paid by the government if they brought in dead snakes. The scheme was aimed at addressing the problem of an increasing number of cobras in the city.
Guess what happened next? Soon, the enterprising Delhiites were breeding cobras. When the government found out, they scrapped the bounty scheme, whereupon the cobra breeders set the snakes free. And the cobra population went up, not down.
This came to be known as the Cobra Effect, which is a phenomenon that occurs when an attempted solution to a problem actually makes the problem worse.
Rationale Behind Cobra Effect
We humans tend to form mental models of the way that cause and effect are related. Our mental models exert an incredibly powerful influence on our perceptions and thoughts. They determine what we see, tell us what events are important, help us to make sense of our experiences, and provide convenient cognitive shortcuts to speed our thinking. However, they can lead us astray. Most of our cause-effect experiences involve very simple, direct relationships. As a result we tend to think in terms of ‘linear behaviour’. In reality as we observe the world is much more complex.
When an action is taken, the intended outcome may occur, but a number of unexpected outcomes will always occur. While an unexpected outcome can be beneficial, however such probability is very rare.
Real World Applications
A similar incident occurred in Hanoi under French colonial rule. When Hanoi was under French colonial rule, they discovered that their villages had a rat problem. So, the regime created a bounty program, similar to that of the British cobra program, that paid a reward for each rat killed. To get paid, people would provide a severed rat tail and get a little cash. Colonial officials, however, began noticing rats in Hanoi with no tails. The Vietnamese rat catchers would capture rats, lop off their tails, and then release them back into the sewers so that they could procreate and produce more rats, thereby increasing the rat catchers’ revenue. It’s fascinating to observe how this problem keeps on repeating over and over again. Policies that seem entirely sensible can lead to unintended – and sometimes unpleasant – consequences.
Delhi has earned the tag of being the most polluted city in the world, outstripping the Chinese capital Beijing, known for its record pollution levels. Owing to the toxic air that Delhi is breathing, the Odd-Even road rationing scheme will be back in Delhi in 2017.
Under the scheme, cars with license plates ending in an odd number and even number are allowed to ply on alternate days. The scheme aims to cut down vehicular traffic by half, thereby reducing air pollution. But it didn’t solve the problem. Because public transport is unreliable, inefficient, unsafe and dirty-looking and the extra burden on the public, the odd-even scheme although it is effective in the short term, it is not a long-term solution as it resulted in people opting to buy a second car with an odd or even number depending on the other car they own.This increased the number of cars in the city and what was worse, the older cars acquired a value because their license plates ended with specific numbers. This worsened the pollution as the older cars were more polluting. Apart from the VIPs, politicians, Supreme Court judges and defence vehicles, women drivers, CNG vehicles were also exempted from the Delhi odd even rule.This was the ‘legal’ route—it appears that this policy also led to a black market in fake CNG stickers: stiff penalties and more policing were required in such cases.
Taking another example of the US Anti-Drug Policy, the US government spends tens of billions of dollars every year to stop addictive drugs from reaching its populace. Its prisons are full of drug dealers and drug addicts. The intention behind all this is to reduce the availability of drugs in the market however, all that money spent does nothing but increase the price of drugs and profit margin for those folks, who have an incentive to smuggle it across the US border. No matter how risky the US government makes it for smugglers and drug dealers to do whatever they do, the addicts can still buy the drugs. The more they try to stop it, the more they fail owing to the Cobra Effect.
In the contemporary era, the cobra effect of discounts offered by the e-commerce companies has also surfaced. E-commerce firms equate unrealised revenue with lost revenue. This means that products that have been added to the cart but not purchased in a long time are considered a ‘loss’. So, in the heydays of GMV-led start-up valuations, the top marketplaces offered 30–50 percent discounts on the products (fashion mostly) in the cart that were over 30 or 60 days old. These were sent as direct push notifications to users. The premise was that since the buyer had shown strong intent to purchase the product, there was high probability that, given a considerable incentive, the user would buy the product at the now heavily discounted price. Moreover, it helped these start-ups achieve sales targets and unlock more value from each user. The strategy worked particularly well in the initial days. That is, until the consumers figured out the pattern. In a highly price-sensitive environment, this became a question of “is this product worth waiting 60 days for?” It surely did for the fashion category at least. That pair of sneakers could wait two months as you already owned at least one pair. What happened here is that users who would have otherwise bought the product at the regular price (and immediately), were now willing to wait for 60 days or more to receive a massive discount on that product. This strategy initiated by e-commerce firms therefore ended up altering consumer behaviour permanently.
Countering The Cobra Effect
If we want to avoid being the victims of the Cobra Effect, we need to reduce the number of unexpected outcomes. For that, we need to improve our intuitions concerning the operation of cause and effect in complex social-ecological systems. Developing methods to help us visualise and understand the cause and effect relations in complex systems is of great importance. We need ways to progress beyond the linear thinking. In particular, we need to understand the concept of feedback and appreciate the dominant role it plays in determining system responses to management initiatives.
The Commerce Society, SRCC 