Around the year 1900, rats were a huge problem in Hanoi, Vietnam — known then as French Indochina. The colonial government came up with a new public policy to solve the problem: a citywide rat bounty program. In an effort to encourage the local entrepreneurial spirit, and to provide locals with a new source of income, the government started to pay citizens to kill rats. But since the colonial rulers didn’t want to be bothered with the task of rat corpse disposal, they decided to pay a bounty of one cent to any person that brought in a rat tail. Sounds like a good policy, right?
The new policy seemed to work brilliantly at first. An avalanche of rat tails began flooding in, supposedly reflecting an impressive number of (bountied) dead rats.
However, the government began to notice something: an increasing number of rats with no tails were roaming the streets of Hanoi, which obviously made the French rulers quite suspicious. They soon realized that although their new policy looked brilliant in theory, it had backfired hard in reality.
Locals had only cut off the tails of the rats, they left the still-living rats free to roam around. Why? Because they knew very well that the stupidest thing they could do would be to kill the very thing that could create more rat tails to harvest as bounties in the future. Put simply, more rats meant more tails, which meant more money. It’s a rather simple equation, huh?
As it turns out, the rat policy had indeed encouraged the entrepreneurial mindset of the local community — but not in the way the colonial rulers had hoped for.
The Hanoi rat story is often cited as an example of the so-called “Cobra Effect.” This economic theory, coined by German economist Horst Siebert, describes how incentives that are designed to improve a system (like society or organization) can lead to unintended — or sometimes perverse — consequences that can make actually issues worse instead of better.
The Cobra Effect
The term “Cobra Effect” is in turn based on a similar myth-like anecdote that describes a policy once implemented by the British colonial government in Delhi, India: a citywide cobra bounty program.
It is too good not to share.
When India was still under British rule, the city of Delhi was infested with venomous cobras. The colonial government was concerned by the high number of snakes and started to offer a bounty for dead cobras.
Again, initially the new policy appeared to be successful at first. Dead cobras turned up in great number. However, the infestation did not abate. Despite a steady increase in numbers of dead cobras presented for bounty payments, there was no decrease of snakes in the street.
What happened? The cobra bounty turned dead snakes into a source of income, and entrepreneurial citizens started to actively breed them to make money. Not much later, a whole industry of cobra farming sprung up throughout Delhi.
As one would expect, the colonial rulers ended up abandoning their cobra policy and stopped paying locals for dead cobras altogether. This made the problem even worse. Suddenly the breeders were now stuck with countless nests of worthless cobras, and simply released them in the city, causing the cobra population to explode.
The Cobra Effect describes how incentives that are designed to improve a system can lead to unintended — or sometimes perverse — consequences that can make actually issues worse instead of better.
Myths or not, these two amusing anecdotes show us that when governments implement policies on their own, without bringing all relevant people to the table, there is a strong possibility that these policies could lead to unintended consequences.
A similar argument can be made for leaders setting organization-wide rules and policies for their companies without bringing the frontline employees into the loop during the process.
Inventing rules from atop the ivory tower is simply a recipe for disaster.
Another amusing anecdote
We wrote about the silliness of setting up new policies from the ivory tower in our book, Corporate Rebels, Make Work More Fun, by describing another amusing anecdote from Jean-François Zobrist, former CEO of French manufacturing company FAVI.
While speaking with him one Sunday morning at his rural home in northern France, he told us about one particular rule put in place in their factory that led to an unintended and undesired outcome:
“Once, walking through the factory, I came across Alfred. He was waiting in front of the storage room and I asked why he was there.
He told me: ‘I have to change my gloves. I have a coupon from my boss and my old gloves.’
The rule was this: when an employee needed new gloves, he had to show the old ones to his boss, take a coupon, go to the storage room, then hand in the coupon and the old pair before he was issued with new ones.
This process struck me as impractical. The accounting department told me that the machine Alfred operated cost 600 francs per hour to run. Gloves cost about six francs a pair. Do the math.
It made me realise that this process was resulting in some very expensive gloves. Even if employees were to take a pair home from time-to-time, everyone would win.”
No further comments needed — the anecdote should speaks for itself.
Inventing rules from atop the ivory tower is simply a recipe for disaster.
But that was not all Zobrist had to tell us regarding ignorant policies leading to unintended consequences. He had yet another amusing anecdote in store for us.
It turned out that FAVI also had their own kind of company-wide bounty program: bonuses for overtime.
When Zobrist started as CEO at FAVI, the factory faced problems with providing on-time delivery of orders to clients. There always seemed to be back-log of orders yet to be produced.
To motivate employees to solve their on-time delivery problems, the former CEO had installed a bonus program for employees that reached overtime to get rid of orders that were still in the backlog.
However, one of the first things Zobrist did when he took over at FAVI was to get rid of this bonus program for overtime.
He told us what happened next:
“Against all my expectations, the productivity of the factory started to not only increase, but increase significantly. Employees were suddenly — on the same machines — producing 20% more pieces per shift.
I was astonished and waited until this effect might fade. But it didn’t. Only after a few weeks did I dare to ask employees why and how they managed to make such an increase productivity. They told me that they knew how to perfectly operate the machines in a more productive way and how to get of rid of the backlogged orders.
When I asked them why they did not do that before, they answered: ‘We are not stupid. If we had done that, we would have stopped earning our bonuses.'”
Sounds familiar doesn’t it? The ‘overtime bonus’ policy of FAVI was a perfect example of the “Cobra Effect.”
But FAVI did not only pay bonuses for overtime; they also paid a bonus to their employees when the heat of the factory exceeded a certain temperature in the summer.
So, what do you think happened?
Zobrist explained to us:
“I noticed that employees tended to close windows when it was hot outside because the bonus was proportional to the heat measured in the factory.
Well damn, the “Cobra Effect” had struck again.
The Cobra Effect: Never Invent Rules From The Ivory Tower
All these amusing anecdotes of unintended consequences demonstrate how the more complicated the system you have to deal with, the more likely it is that there will be unwanted surprises after the system-wide rules are implemented. Especially when the “rulers” control the agenda by themselves and neglect to bring all relevant stakeholders to the table when drawing up the rules.
The big (obvious) lesson here is that new rules dumped from the ivory tower onto the frontlines can come back to bite you.