Perverse Incentive

What Is the Perverse Incentive in Simple Terms?

The Perverse Incentive or Cobra Effect is a situation where the intended solution or incentive ends up making the original problem even worse.

The Story Behind The Perverse Incentive

The authorities of British India wanted to reduce the population of cobras. To achieve this, they offered a financial reward for every cobra head that individuals brought to the authorities.

However, this incentive led people to begin breeding cobras so they could later kill them and collect the reward for profit. Instead of reducing the number of snakes, the policy caused the cobra population to increase dramatically. This unintended outcome became known as the Cobra Effect.

Perverse Incentive in Real Life

1. A business wants its employees to serve more customers over the phone and therefore sets a daily target of at least 100 phone calls.
   
   To reach this goal, employees begin making fake one-second calls simply to increase their call numbers. As a result, the problem becomes even worse because employees spend time manipulating the metric instead of genuinely helping customers, ultimately serving fewer people overall.
2. When a natural disaster destroys property and the government offers financial assistance based on the extent of the damage, some individuals who do not qualify may intentionally damage their own property in order to receive aid and renovate or replace it at reduced personal cost.
3. Some city governments have funded homeless shelters based on the number of beds filled each night. In such systems, shelters may have no financial incentive to move people into permanent housing, since an empty bed can mean a loss of funding.
   
   As a result, a system intended to reduce homelessness can unintentionally create financial incentives that help maintain it.

Conclusion

When a policy’s incentive structure rewards the wrong behavior, it can worsen the very problem it was designed to solve.