I made a mistake this weekend. I should have known better.

The lesson at hand? The law of unintended consequences, particularly the type known as “perverse incentives” or the Cobra effect.  

My kids participated in two “trick or treat” events on Saturday and Sunday. I was worried about the overconsumption of ultra-processed candy.

So, I cooked a delicious homemade brownie with organic sweet potatoes, cacao and other wholesome ingredients.

I made a deal with the kids. For every three ultra-processed candy bars they would give me, they would get a piece of my awesome brownie.

My intention was simple: maintain the joy of Halloween but with a healthier treat.

The kids loved the brownie, and the strategy worked well on Saturday. But, on Sunday, everything went south.

They returned from their “trick or treat” with hundreds of candies. Since they knew they could use them as currency to buy my brownies, they took as many as they could from every house!

I have recently become a lot more conscious of the perils of ultra-processed food. The sight of the mountain of candies created a physiological stress response in my body.

The brownie trade had backfired. Of course!

Examples of Perverse Incentives

There are so many examples from the history of incentives gone wrong.

In India, during British rule, worried about the abundance of cobras, the authorities offered a bounty for every dead cobra.

It worked initially, but then people started breeding cobras to make more money. When the measure was scrapped, more cobras than before were released into the wild!

Insurance companies only paying for treatment instead of prevention is another perverse incentive.

People are incentivised to ignore a condition until it needs treatment. It encourages unnecessary treatments with more side effects. Overall, it increases the total need for treatments.

Every incentive can have unwanted results. Let’s look at business.

If you incentivise your team for revenue, they may take on unprofitable clients.

If you incentivise for profit, they may underinvest in the growth of the business.

If you incentivise individual effort, you might create unhealthy competition among your team members. If you incentivise team effort, you might incentivise freeloaders.

A lot of the incentives out there are antiquated and have unintended consequences. I have coached high-growth companies that have scrapped most of them, even commissions to their sales team with great success.

The Alternative? Education & Intrinsic Motivation

Being aware of the adverse effects of your incentives is crucial.

Both carrots and sticks are forms of manipulation. It’s human nature to resist being manipulated and game systems to one’s advantage.

So, what’s the alternative? Context and trust can be more powerful than any blunt incentive scheme.

When individuals understand the ‘why’ behind actions, they are empowered to make informed decisions.

We watched the “Live to 100” documentary with the kids this week. It provides entertaining education about the Blue Zones, places where people live long, healthy lives. Spoiler alert: they do not consume ultra-processed food.

Education is pivotal. It fosters intrinsic motivation—the most potent and enduring kind.

Fortunately, I struck a deal with my kids, and we donated most of the candy. In return, I committed to cooking homemade desserts for three more weekends:-)

This outcome, although not what I’d initially envisioned, became a lesson in the complexities of incentives.

As leaders and parents, we will continue to navigate the fine line between guiding and manipulating behaviour. Let’s opt for education and empowerment over the simplicity of reward systems.

Perhaps, this way, we’ll avoid the pitfalls of our own Cobra effects and foster businesses and communities.

Take care,

Caterina

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PPS: In 2016, I did a lot of research on bribing kids; you can read the article here.

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