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November 07, 2019 Thursday 12:13:10 PM IST

Leaders N’ ‘Cobra’

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We live in a highly connected world where decisions of leaders have multiple outcomes. When a decision is taken, the intended outcome might occur, but a number of unexpected outcomes will always occur. This is because, most of our cause-effect experiences involve very simple, direct relationships. As a result, we tend to think in terms of ‘linear’ behaviour - double the cause to double the effect, halve the cause to halve the effect. In reality, the world is often more complex than we realise. Cobra effect is a classic example. A cobra effect occurs when unintended consequences of an action can worsen a situation. Coined by German economist Horst Siebert in his 2001 book of the same name, the cobra effect is often the result of incentive policies gone haywire -the phenomenon is also described by the equally juicy term, ‘perverse incentives’.

The original cobra effect

The term ‘cobra effect’has its roots from the colonial India. Delhi suffered from anexplosion of the number of cobras, which was an issue very evidently in need of a solution given the sorts of things that cobras bring, like death. To bring down the number of cobras slithering through the city, the local government placed a reward on destroying them. This seemed like a perfectly rational solution. The reward was substantial enough that many individuals took up cobra hunting, which led exactly to the anticipated outcome - the cobra population dwindled. And that’s where things get interesting. As the cobra population declined and it became tougher to find cobras in the wild, people became rather innovative. They started breeding cobras in their homes, which they would then kill to collect the reward as before. This led to a new problem. The local authorities understood that there were very few cobras visible in the city, but they,however, were still paying the reward to the same degree as before.In the end, Delhi had a bigger cobra problem after the reward ended than it had before it began. City officials did a sensible thing: They cancelled the reward. In response, the people raising cobras in their homes also did a rational thing: They set free all of their now-valueless cobras back into the streets. Who wants a house full of cobras?  In the end, Delhi had a bigger cobra problem after the reward ended than it had prior to the introduction of it. The unintended consequence of the cobra extermination plan was a steep increase in the number of cobras in the streets.

A fine that backfired


The most exciting example of cobra effect comes from an unlikely source– day-care centres in Israel. In Haifa, day care centres closed at 4p.m. every day, and just relied on the good intentions of parents to pick up their children on time. Somehow, this worked; parents picked up their kids on time and rarely did they come after 4:30p.m. Why were parents hardly late? Being late meant depending on the generosity of one teacher, who would unavoidably stay late to look after the child. Being late meant facing that same teacher and having to say sorry to her for the trouble of waiting. All of which provokedresearchersto be curious: what would happen if these day-care centres stopped depending on the kindness of the teachers and started relying on a monetary incentive - like a fine - to discourage parents from showing up late? Few would have foretold what the researchers found -presenting a financial penalty for showing up late essentially caused parents to do just that. Parents stopped showing up on time. To come to theirastonishinginference, researchers ran an experiment. Out of 11 day-care centres across Haifa, they randomly chose six and announced a small fine for parents who showed up more than 15 minutes late in each of them. In the centres where the fine was imposed, parents almost instantaneously started showing up late, with lateness levels eventually becoming about twice the pre-fine level. That is, imposing a fine resulted in twice as many parents to show up late. What about the remaining four day-care centres that were left fine-free? Latenesslevels remained unchanged.

 

World’s cheapest car

The concept of the world’s cheapest car germinated from Ratan Tata on a rainy day after he saw a family of four on a bike. After a nine-year run, Tata Nano, a car regarded as a wonderful product, launched in a segment having a billion-dollar opportunity, is ready to drive into the sunset as sales and production go down to a trickle. Hope had run high; the organizationanticipatedthat all current and prospective two-wheeler owners would shift to Nano.But they ignored to dwell deeper - a car advertised as ‘the cheapest car’, generated huge initial interest. But it never took off. Later on, Ratan Tata confessed that the reason for failure of the idea was none other than the term which became synonymous with Nano –‘The cheapest car’. Buying a car in India is related with social status.if an individual owns a car, he is supposed to be successful and settled. But the word ‘cheap’ in its advertisingdrives spoiled everything. The firm also failed to recognize the competition from used-cars. Used cars which were superior in quality, space and mileage were available to the same customer -segment at the same or lesser price than Nano.


The key takeaway for leaders from the Cobra effect is that they should be keenly aware that every human action has both intended and unintended consequences. Human beings react to every rule, regulation, and order imposed upon them, and their reactions result in outcomes that can be quite different than the outcomes that the leaders intended. While there is a place for leadership decisions, that place should be the one defined by both great caution and tremendous humility. Sadly, these are character traits not often found in those who become leaders, which is why examples of the cobra problem are so easy to find.


Dr. Manu Melwin Joy

The writer is an Assistant Professor at School of Management Studies, CUSAT

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#A cobra effect occurs when unintended consequences of an action can worsen a situation. It is often the result of incentive policies gone haywire or perverse incentives.