Category: Financial Gyan

The term Cobra Effect originated in an anecdote set at the time of British rule of colonial India. It is particularly important to know about it especially for the decision makers. If you are in a role which is responsible for making decisions which impact a large number of people, you must read it.

The Cobra Effect is a term in economics. It refers to a situation when an attempted solution to a problem makes the problem worse. And here is the anecdote from the British rule when the term is said to be coined.

For some reasons, there were too many venomous cobra snakes in Delhi. People were dying due to snake-bites and it became scary for almost everyone to step out of their houses. The government of the day had to get into action to stop this menace and it offered a silver coin for every dead cobra. The results were great, a large number of snakes were killed for the reward.

Eventually, however, it led to some serious unwanted consequences. After a short-term dip in cobra population, it started going up. This was because few people began to breed cobras for the income. When the news reached the government, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the cobra population further increased. The solution for the problem made the situation even worse. The unintended consequence for a well-intentioned idea led to making the problem worst.

Trying a new solution?
or
Planning to tackle an existing problem with a new idea?

Well, it’s time to pause and think about how people would respond to the new idea that may sound great on paper! Specially the solutions that try to affect how people behave. There’s always a certain group of people who have a tendency to game the system -intentionally or otherwise.

They have a tendency to take short-term advantage of any situation though that may lead to harm to them & society-at-large only in the long run.

Every solution has consequences and those consequences may lead to certain situations where rather than solving a current problem, you may end up with more complex problems.

Few more examples: A similar type of incident like increasing cobra-population occurred in Vietnam. The rulers realised that there were too many rats in Hanoi and spread of plague was imminent They created a reward program that paid a prize for each rat killed. To obtain the bounty, people would provide the severed rat tail. After initial success, the officials, however, started noticing rats with no tails. The rat catchers would capture rats, cut off their tails, and then release them back into the sewers so that they could breed and produce more rats, thereby increasing the rat catchers’ profits.

As they say the road to hell is paved with good intentions, the similar mistakes are happening around us everyday when the decision-makers fail to take a 360 degree view of all the possible outcomes of an action before implementation.

Nearly 2 years ago, city of Philadelphia in USA passed a “soda tax” – a US $1 tax on a typical 2-liter bottle of soft-drink- as a “sin tax” in the national war on obesity. But the natives didn’t cut calories as a result of the tax on sweetened drinks, nor there was a shift towards any healthier option. Instead, most of them just drove outside the city to buy the same colas , from stores where they didn’t have to pay the tax. But the poorest paid more as they could not find it affordable to drive out of the city to buy their drinks. In the end , city suffered loss of revenue due to lower sales whereas the lower section society paid more .

The unintended consequence for a well-intentioned idea led to making the problem worst.

Even big & brilliant companies do the same mistake!

It is not that mistakes happen only with the government run programs, there’re n numbers of examples in great private companies too where the best & brilliant people lose sight of certain negative outcomes due to the initial magic of seemingly great looking ideas.

The Nano Car – a small car that could never it make it big !
The car once touted as the world’s cheapest, Tata Nano, ran into a dead end as sales and production went down to a trickle. The poor demand resulted in Tata Motors shutting down the plant.

A car considered as a brilliant product, launched in a segment having a billion dollar opportunity. Hope ran high , the company expected all present and potential two-wheeler owners would shift to Nano.

But they forgot to dwell deeper – a car marketed as ‘the cheapest car’, created huge initial interest. But it never took off. Later on, Ratan Tata admitted that the reason for failure of this idea was none other than the term which became synonymous with Nano – “The cheapest car”. Buying a car in India is associated with social status and prestige; if a person owns a car, he is assumed to be successful and settled. But the word ‘cheap’ in its marketing campaigns spoiled everything.

The company also failed to dwell upon the competition from used-cars. Used cars from other companies, which were much better in quality, space and mileage were available to the same customer-segment at the same or lesser price than Nano.

An intelligent team of people failed to think about the above likely outcomes because it became temporarily blinded by the brilliance of such a great idea, by the idea of tapping a billion-dollar opportunity.

Apple turning sour!
In 2017 Apple admitted that it was slowing down the speed of old iPhones as the batteries of those old phones were degrading with the passage of time. To make up on loss of brand image and to satisfy its erstwhile customers, it offered to cut its US $79 battery replacement feed down to US $29 as a way of apologising. This lower fee led to more people in 2018 ended up swapping their batteries — instead of upgrading to the latest iPhone models thus affecting new iPhone sales. As iPhone batteries became cheaper and easier to replace, fewer people are shelling out for new iPhones that can now cost up to US $1,449.

In January that year, Apple revealed that it was expecting a $9 billion loss in revenue due to weak iPhone demand that’s partly caused by more people replacing their batteries, according to a letter issued by CEO Tim Cook addressed to investors.
Slowing down of iPhones sales can be attributed to many external reasons too (better Chines phones, better Apps on Android phones etc ), but strategy of battery-replacement was an internal idea. It would have been handled better if people at top would have thought more about it , if they would have filtered this program from Cobra effect.

What’s in it for you ? Next time if you or your team has some brilliant idea , get your brilliant guys together in a room and think about the Cobra- effects before implementing that idea.

You can always fine-tune the idea to minimize the negative implications by spending few extra hours/days before rushing to announce it. Don’t rush to implement it while you’re under the awe of the brilliance of a never-tested, nice-looking solution or idea, think about the Cobra-effects first.