The Cobra Effect: Dangers of Incentives

The cobra effect demonstrates how poorly designed incentives can lead to unintended consequences. Initially meant to reduce the cobra population in India, a bounty system led to locals breeding cobras to profit from the rewards, ultimately increasing the population instead. This phenomenon aligns with Goodhart's law, which states that once a performance measure becomes a target, its utility often diminishes. Real-world examples, such as the fraudulent account openings at Wells Fargo and the hire-to-fire practices at Amazon, further illustrate how an overemphasis on specific targets can produce negative outcomes rather than the intended improvements.