August 13, 2023

Perverse Incentives: The Price You Pay for Shallow Thinking

By Paul William

August 13, 2023


Disclosure: Some of the links below may be affiliate links which means I receive a commission, at no extra cost to you, if you make a purchase through them.

Incentives spur you to take action. 

For example, the promise of a paycheck gives me the nudge I need to work each day, instead of staying in bed. 

But sometimes incentives backfire.

Perverse incentives are incentives that result in unintended negative consequences — meaning they often lead to the exact opposite of the intended outcome.

Dead Cobra Bounties: the Ultimate Perverse Incentive

cobra bounty perverse incentive in india

Once upon a time, the British government needed to control the fast growing wild snake population in an oversees territory.

So they came up with a plan to offer cash rewards in exchange for dead cobra heads.

The sequence of events played out like this:

1. The government offered a bounty for dead cobras. 

2. Enterprising people began breeding new cobras and selling those to the government, rather than hunting wild snakes.

3. The government caught on and canceled the program.

4. The breeders setting the worthless snakes free, ultimately increasing the wild cobra population. 

This is obviously not ideal.

How Do You Avoid Perverse Incentives?

caveman licking lightbulb stupid

Let’s be real: the creativity of human interpretation and willingness to push the envelope is unbounded.

It’s why the U.S. tax code isĀ thousands of pages long and why television commercials have disclaimers telling you not to jump your car over a bridge.

I don’t think we can ever avoid dealing with perverse incentives all together, but I do think that we can approach planning in a way that respects human nature and increases our odds of success.

In practice, that probably looks something like this:

  • Always assume people will act in their own self-interest and prioritize their own success over the collective good of any system or society. Of course not everyone will, but it’s a significant enough portion to warrant the heuristic when you’re making plans that are dependent on compliance from millions of people.
  • Increase education around second and third order thinking. Teach kids (and adults) to think beyond the simple and obvious implications of an action. One way to do this is to share this article with your friends and family (wink wink, nudge nudge).
  • Embrace the reality that there are unknown unknowns. That is, things we don’t know we don’t know. This means that it’s ok to try something, as long as you’re willing to recognize the mistake and change course when you realize it’s counterproductive. Unfortunately, the reality of politics (both in government and organizations) often leads to people continuing to advocate for failed policies in order to save face or manipulate perception. But we’ll keep fighting the good fight!

Bonus Example: Perverse Incentive of Deer

deer on a landscape

To reduce deer populations, hunters hunted more deer, which left more food for remaining deer, which increased sexual fitness of remaining deer, which led to higher rates of deer reproduction.

Biologists eventually realized that it was much more effective to simply go into the woods and destroy the deer’s food source, leading to a decreased sexual fitness and reproduction.

But I have yet to hear a hunting rifle manufacturer come out in support of weed killer.

Conclusion

In our complex world, where incentives are often used to motivate behavior, it’s essential to recognize the potential for perverse incentives that lead to unexpected and detrimental outcomes.

By understanding human nature, prioritizing education about second and third-order thinking, and remaining adaptable to unforeseen circumstances, we can mitigate the risks of these destructive incentives.

The lessons learned from historical examples like the cobra bounty or deer hunting are more than mere anecdotes; they are stark reminders that our attempts to control or manipulate outcomes require a deep, nuanced understanding of the systems we are influencing.

By embracing a mindset that goes beyond the surface and examining the potentially far-reaching consequences of our actions, we can make wiser decisions that lead to the success and well-being of our society.

Frequently Asked Questions (FAQs)

  1. What are perverse incentives?
    • Perverse incentives are incentives that end up causing unintended negative consequences, often leading to the exact opposite of the intended outcome.
  2. Can you give an example of a perverse incentive?
    • A classic example is the British government offering bounties for dead cobras, leading to people breeding cobras for profit and ultimately increasing the wild cobra population.
  3. How can we avoid creating perverse incentives?
    • Avoiding perverse incentives involves recognizing human self-interest, increasing education around complex thinking, and being willing to adapt when a mistake is discovered.
  4. Why are perverse incentives a problem in modern society?
    • Perverse incentives can lead to unexpected negative results, such as wasted resources or worsening a problem that the incentive was designed to solve.
  5. What’s the relationship between perverse incentives and human behavior?
    • Human behavior, especially the tendency to act in self-interest, plays a significant role in the manifestation of perverse incentives. People often exploit incentives in ways that are personally beneficial but harmful to the larger system.
  6. Are perverse incentives always negative?
    • While the term “perverse” implies a negative outcome, the effects may vary. The real challenge is the unpredictability and potential for harm that can arise when an incentive system is misaligned with its intended goal.
  7. Why is education about second and third-order thinking important?
    • Teaching people to think about the deeper and broader implications of actions helps in understanding the complexity of systems and can prevent the creation of incentives that might lead to undesirable consequences.
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