In the 1990s, day care centers had a problem. The kids weren’t being picked up on time, causing lots of disruptions for both the staff and the children.
Around this time, I was dating someone who worked at a day care center, and she told me all about this problem.
Teachers had to stay back with waiting children, which meant they had to work longer, and waiting anxiously with a child could be emotionally taxing. Children had their evening schedules messed up, and it seems likely that some of these kids would form a negative opinion of day care.
Day care businesses lost a lot of money, too. The extra time staff spent due to late arrivals could have been used for other activities that generated revenue.
In summary, this was a well-known mess in the day care industry all over the developed world. That’s when two economists stepped in to run an experiment.
Uri Gneezy and Aldo Rustichini decided to run a study across several different day care centers in Haifa, Israel. They set up a small fine for parents who were more than 10 minutes late to pick up their children, and the day care centers rolled this out in 1998.
Everyone was pretty excited about this policy. Most folks expected to see a significant drop in late parents.
Nope.
Instead, the opposite happened: after the fine was enacted, the number of late pickups increased by 100%.
Wait, what?
This is a perverse incentive, something designed to motivate a person (or group) to act a certain way, in order to get the desired outcome, but which utterly fails by motivating them in the exact opposite way.
Economists believe that parents were previously motivated by guilt to be on time, and the fine replaced that guilt. Up until then, it was shameful to pick your kid up late.
After the rollout of the fine, it was transactional. The parents didn’t seem to mind inconveniencing the teachers; after all, they were paying for the privilege.
Perverse incentives are everywhere. Think about traffic ticket quotas, and how officers are pushed to give a certain amount of tickets regardless of the driver behavior they encounter.
Think about the salesperson who is given quota for a period, so she goes out there and gives ridiculous discounts. Sure, she makes that top line number, but this blind strategy loses the business a lot of money.
If you think of some examples of this from your own life, let me know in the comments:
The Cobra Effect describes this process, and it draws its name from a really interesting moment in history.
The British government was concerned about the number of venomous cobra snakes in Delhi. To reduce the cobra population, the government offered a bounty for every dead cobra brought to them.
Seems sensible, right? Want fewer cobras? Show me a bunch of dead cobras.
Initially, this strategy seemed to work.
Dead cobras were produced. The cobra population began to decline.
Then, people realized that they could breed cobras and kill them for the bounty. As a result, cobra farms began cropping up.
Oops. As a result, the wild cobra population in Delhi increased rather than decreased.
As a business owner, I can say confidently that incentives are one of the toughest things to get right. The intricate balance you need is like tiptoeing on a tightrope.
There’s simply no shortcut here, and sometimes you have to make mistakes before you learn how to dial this in.
Being in this position makes me acutely aware of how tough a job policymakers have. I’m an awful lot more forgiving of leaders who try to get something done, only to see their efforts result in making the situation worse.
In your own experiences, have you encountered a situation where well-intentioned actions led to unexpected and counterproductive results? Let’s collect our experiences here today, and add a little wisdom to the world.
Wow, I feel smart today!
It's one of the rare cases where I was already familiar with both the "kindergarten fee" and the "cobra" stories, if only on a surface level.
I think the world of SEO is full of these kinds of perverse incentives. Google will hint at a certain behavior being a positive ranking factor, and then lots of people will chase that for the sake of the ranking factor alone. Take something like "session duration" - normally, this tells Google that people find your site valuable and want to stick around. But in optimizing specifically for "session duration," some websites might end up designing an overly complex process that doesn't make the user experience any better and instead just tricks people in staying on the site for longer than necessary. (It'll probably end up hurting the site in the long run because of other behavioral signals, but still.) And on it goes.
I think most people will exploit someone or something if they can. I rent out on of my homes and because I lived there I didn’t charge a cleaning fee and we were booked full. I did the work myself and to my high standard but it was taking a toll on my attitude. My ex suggested I pay myself with a cleaning fee and so I started to add one to the price. I did make more money- but because the guests had to pay a cleaning fee all the sudden instead of dealing with 5% of guests leaving big messes or disrespecting my house. All the sudden about 60% of guests would feel entitled to leave a mess because they paid a fee. Which only resulted in me feeling more drained and more upset when people didn’t care for my home the way loved it.
My solution, I gave that cleaning fee to someone else. They happily cleaned any mess because it was their job and stopped stressing myself out. And if someone did something really awful- I’d make them replace whatever they damaged and put that in bold on my ad. The messes started to lessen.
I find this true in relationships as well. If I don’t set good boundaries and remove myself from behavior I don’t find agreeable with the person I am or want to be- then people will take and take and take. But if I start off unwilling to accommodate bullshit, then people won’t even try any.
It’s definitely a balance. 🙃