Perverse Incentives

Perverse incentives are rewards or penalties that lead to unintended and undesirable outcomes by encouraging harmful behavior contrary to the interests of the incentive creators.
The British government, aiming to reduce the cobra population, offered a bounty for every dead cobra. This led to people breeding cobras to kill and submit for the bounty. When the scheme was abandoned, breeders released the now-worthless snakes, increasing the cobra population.
In 1958, Mao Zedong declared sparrows to be pests and initiated a campaign to eliminate them, resulting in mass killings of sparrows. The lack of sparrows led to a surge in crop-eating insects, contributing to the Great Chinese Famine.
Mexico City implemented a program where cars were banned from the city one day a week based on license plate numbers. Instead of reducing the number of cars, it led to people buying older, more polluting cars to use on their off days, increasing overall emissions.

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Provide a short but clear definition of perverse incentives?

Perverse incentives are rewards or penalties that lead to unintended and undesirable outcomes by encouraging harmful behavior contrary to the interests of the incentive creators.

A perverse incentive is a reward or punishment that unintentionally encourages behavior that goes against the original goal. It’s like offering a reward for catching mice, but the reward attracts more mice!

Provide 10 diverse stories from history of perverse incentives.

Cobra Effect in Colonial India: The British government, aiming to reduce the cobra population, offered a bounty for every dead cobra. This led to people breeding cobras to kill and submit for the bounty. When the scheme was abandoned, breeders released the now-worthless snakes, increasing the cobra population.
Rat Bounty in Hanoi: Similarly, the French colonial government in Vietnam offered a reward for each rat tail presented as proof of killing a rat to combat bubonic plague. People began cutting off tails and releasing rats to breed, so they could continue to collect bounties.
The Great Sparrow Campaign in China: In 1958, Mao Zedong declared sparrows to be pests and initiated a campaign to eliminate them, resulting in mass killings of sparrows. The lack of sparrows led to a surge in crop-eating insects, contributing to the Great Chinese Famine.
Australian Toad Introduction: In 1935, cane toads were introduced into Australia to control cane beetle populations. However, the toads couldn’t jump high enough to eat the beetles, which live on top of sugar cane stalks. The toads became an invasive species, causing ecological problems without controlling the beetles.
Mexico City’s “Hoy No Circula” Program: To reduce pollution, Mexico City implemented a program where cars were banned from the city one day a week based on license plate numbers. Instead of reducing the number of cars, it led to people buying older, more polluting cars to use on their off days, increasing overall emissions.
The Streisand Effect: Named after Barbra Streisand, who in 2003 tried to suppress photographs of her home, leading to widespread distribution of the images. Efforts to hide, remove, or censor information can result in increased publicity.
The Dead Sea Scrolls’ Copyright: The Jordanian government granted exclusive publication rights to a small team of scholars in the 1950s. This monopoly led to significant delays in the release of the texts, encouraging black market sales and limiting academic study.
South African Apartheid’s Labor Laws: To protect white employment, the government implemented job reservation policies, restricting certain jobs to white people only. This led businesses to mechanize operations, reducing overall employment and harming the very group the policy intended to protect.
The Strengthening of Pirates through Naval Suppression: In the early 18th century, the British and other navies intensified efforts to suppress piracy. This inadvertently led to pirates becoming more organized and forming the “Pirate Republic” in Nassau, making them stronger and more resilient.
The Window Tax in England: Introduced in 1696, this tax was based on the number of windows in a house as a proxy for the owner’s wealth. To reduce tax liability, people bricked up windows, leading to poor ventilation and health problems in buildings, an outcome contrary to the tax’s intention to be a fair wealth indicator.

The Sparrow of Paris (18th Century): To reduce the rat population, Parisians offered a bounty for dead rats. This backfired as people started breeding rats to claim the reward, leading to a bigger problem!
The London Fog (19th Century): In an attempt to reduce coal smoke pollution, London implemented a tax on coal use. However, people switched to burning cheaper, but smokier alternatives, worsening the fog.
The Great Sparrow Campaign (1950s China): Chairman Mao encouraged the elimination of sparrows, believing they ate grain. People killed millions, but with their predators gone, insect populations exploded, causing far greater crop damage.
The Cobra Effect (1960s India): To reduce venomous cobra populations, the Indian government offered bounties for dead cobras. This led to people breeding cobras to claim the reward, then releasing them!
The Boeing Bonus (1970s): Boeing offered bonuses to engineers based on the number of planes produced. This resulted in cutting corners on safety features, leading to several deadly accidents.
The Texas Two-Step (1990s): Texas offered financial incentives to doctors for performing certain procedures. This led to unnecessary surgeries for profit, not patient needs.
The Zero-Tolerance Drug Policy (1980s-Present): Intended to curb drug use, this policy led to increased incarceration for minor offenses, straining the justice system and disproportionately impacting minorities.
The Subprime Mortgage Crisis (2000s): Financial institutions were incentivized to sell risky subprime mortgages, leading to a housing bubble and the 2008 financial crisis.
The Clickbait Craze (2010s-Present): Online platforms reward content based on clicks, not quality. This incentivizes sensational and misleading headlines, eroding trust in information.
The Teacher Evaluation Wars (2010s-Present): Standardized tests used to evaluate teachers can incentivize “teaching to the test” rather than fostering well-rounded learning.

What kinds of principles and heuristics can we employ to reduce the chances of introducing perverse incentives when creating policies?

To reduce the chances of introducing perverse incentives when creating policies, consider employing the following principles and heuristics:

Thorough Impact Assessment: Before implementation, conduct comprehensive assessments to predict potential outcomes and side effects of a policy. This includes evaluating historical precedents and consulting a wide range of experts to foresee unintended consequences.
Incremental Implementation: Roll out policies gradually in phases or pilot programs before full implementation. This allows for monitoring and adjustment based on real-world feedback and data, minimizing the risk of widespread perverse incentives.
Feedback Loops and Flexibility: Establish mechanisms for continuous feedback from those affected by the policy. Be prepared to make adjustments and amendments to the policy as unintended consequences are identified.
Aligning Incentives with Desired Outcomes: Carefully design incentives so that they directly encourage the behaviors that lead to the desired outcomes, rather than just intermediate metrics that can be easily gamed.
Broad Stakeholder Engagement: Engage a diverse group of stakeholders in the policy design process, including those who will be directly affected. This can uncover potential perverse incentives that policymakers might not anticipate.
Avoiding Overly Specific Targets: Policies that focus too narrowly on specific metrics can lead to gaming the system. Instead, use broader, more comprehensive measures of success to avoid incentivizing undesired behaviors.
Transparent and Open Communication: Ensure that the goals and mechanisms of the policy are communicated clearly and transparently to prevent misunderstandings that could lead to perverse incentives.
Simplicity and Understandability: Complex policies with numerous conditions and exceptions are more likely to lead to unintended outcomes. Simplifying policies can help ensure that the incentives align more closely with the desired behaviors.
Monitoring and Evaluation Systems: Implement robust systems to monitor outcomes and evaluate the policy’s effectiveness over time. This should include indicators to detect perverse incentives early.
Ethical Consideration and Social Equity: Evaluate the ethical implications and equity impacts of a policy to ensure it does not disproportionately benefit or harm certain groups, which could lead to broader societal perverse incentives.

By applying these principles thoughtfully, policymakers can better anticipate and mitigate the risks of perverse incentives, leading to more effective and beneficial outcomes.

Here are some principles and heuristics to reduce perverse incentives when crafting policies:

Consider All Actors and Their Motivations:

Think Like a Gamer: Imagine everyone involved is trying to “win” within the system. How could they exploit it for personal gain, even if unintended?
Multi-Stakeholder Analysis: Identify all parties affected by the policy (citizens, businesses, government agencies) and consider their potential responses.

Focus on Long-Term Goals:

Don’t Just Track Outputs: While outputs (arrests made, test scores) are easy to measure, focus on the desired long-term outcomes (public safety, well-rounded education).
Future-Proofing: Consider how the policy might incentivize behavior in unforeseen circumstances as situations evolve.

Design for Transparency and Accountability:

Clear Goals and Metrics: Define goals explicitly and choose metrics that truly reflect progress towards them.
Monitoring and Evaluation: Build in mechanisms to track the policy’s effectiveness and identify unintended consequences early.

Embrace Flexibility and Iteration:

Pilot Programs: Test policies on a small scale before full implementation to identify and address perverse incentives early.
Adaptive Management: Be prepared to adjust the policy based on real-world data and feedback from those affected.

Remember: There’s no foolproof method, but these principles can help design policies that achieve their intended goals and avoid unintended pitfalls.

How can we identify and quarantine bad actors who are trying to game the system?

Identifying and quarantining bad actors who are trying to game a system, particularly in the context of policies, regulations, or digital platforms, requires a multi-faceted approach combining technology, human oversight, and policy design. Here are strategies that can be effective:

Data Analytics and Monitoring: Use advanced data analytics to monitor behavior patterns and detect anomalies that indicate someone is trying to game the system. This could include unusual transactions, patterns of behavior that match known fraudulent activities, or other red flags.
Machine Learning and AI: Implement machine learning algorithms that can learn from past incidents of gaming the system to better predict and identify future attempts. These tools can adapt over time as bad actors evolve their strategies.
User Verification and Authentication: Strengthen verification processes to ensure that users are who they claim to be. This can include multi-factor authentication, biometric verification, and background checks for high-stakes environments.
Community Reporting and Feedback: Leverage the power of the community by allowing users to report suspicious behavior. This not only helps in identifying bad actors but also engages the community in maintaining the integrity of the system.
Transparent Rules and Consequences: Clearly communicate the rules of the system and the consequences for attempting to game it. Knowing that there are stringent checks in place and that penalties will be enforced can deter bad actors.
Regular Audits and Reviews: Conduct regular audits and reviews of transactions, user activities, and system vulnerabilities. This helps in early detection of potential gaming and provides insights for improving security measures.
Collaboration and Information Sharing: Collaborate with other organizations, agencies, or platforms to share information about known bad actors and emerging strategies for gaming the system. Collective defense strategies can be more effective than going it alone.
Dynamic Response Systems: Develop systems that can dynamically respond to detected threats by limiting functionality, quarantining accounts, or implementing additional verification processes in real-time.
Legal and Policy Frameworks: Ensure that there are robust legal and policy frameworks that support the identification, prosecution, and punishment of individuals or entities attempting to game the system. This includes having clear policies on privacy and data protection.
Ethical and Transparent AI Use: Ensure that the tools and algorithms used for monitoring and enforcement are used ethically, with transparency about how decisions are made, particularly if they impact access to services or impose penalties.

Employing these strategies requires a balance between being effective in deterring and catching bad actors and ensuring that legitimate users are not unduly burdened or falsely accused. Continuous evaluation and adaptation of these strategies are crucial as tactics to game the system evolve.

Identifying and quarantining “bad actors” gaming the system requires a multi-pronged approach:

Data Analysis and Monitoring:

Track Anomalies: Use data analysis to identify unusual activity patterns that deviate from expected behavior. This could involve sudden spikes in claims, rapid completion rates, or geographically concentrated activity suggesting organized manipulation.
Risk Scoring: Develop scoring systems that assign a risk level to individuals or activities based on pre-defined criteria. These criteria could include inconsistencies in application data, past history of abuse, or connections to known bad actors.

Enhanced Verification:

Multi-Factor Authentication: Implement stronger verification processes beyond basic credentials. This could involve incorporating phone confirmations, biometrics, or additional documentation.
Random Audits: Conduct regular, random audits of high-risk applications or suspicious activity to verify legitimacy.

Human Expertise and Investigation:

Trained Analysts: Invest in personnel trained to identify red flags and investigate potential fraud.
Collaboration: Develop partnerships with law enforcement and other stakeholders to share information and build a comprehensive picture of bad actors.

Quarantine Strategies:

Denial of Service: In certain cases, temporary or permanent denial of access might be necessary to prevent further exploitation.
Limited Functionality: Restrict access to specific features or benefits for high-risk individuals, allowing them to participate but limiting their ability to manipulate the system.
Escalation & Alerting: Flag identified bad actors and share information with relevant authorities or platforms to prevent future attempts.

Remember:

Balancing Security and Access: Striking a balance between security and user experience is crucial. Overly stringent measures can discourage legitimate participation.
Adapting to Evolving Tactics: Bad actors constantly develop new methods. Regularly review and update detection techniques to stay ahead.
Transparency and Communication: Be clear about how the system identifies and handles bad actors. This fosters trust and discourages manipulation attempts.

By combining data analysis, enhanced verification, human expertise, and appropriate quarantine strategies, you can create a more robust system that discourages manipulation and protects its integrity.

Create a 10-item quiz on the discussion above.

Quiz

What is a perverse incentive?
Name a historical example where a bounty system led to an increase rather than a decrease in the target pest population.
What unintended consequence did the Great Sparrow Campaign in China have on agriculture?
How did the introduction of cane toads to Australia backfire?
What was the unintended outcome of Mexico City’s “Hoy No Circula” program?
What does the term “The Streisand Effect” refer to?
Why did the Dead Sea Scrolls become difficult for scholars to access?
What was a consequence of South African Apartheid’s labor laws?
How did intensified efforts to suppress piracy in the early 18th century backfire?
What was a negative consequence of the Window Tax in England?

Answers

Rewards or penalties that lead to unintended and undesirable outcomes by encouraging harmful behavior.
The Cobra Effect in Colonial India.
It led to a surge in crop-eating insects, contributing to the Great Chinese Famine.
The toads became an invasive species without controlling the beetle population.
It led to people buying older, more polluting cars to use on their off days, increasing overall emissions.
Efforts to hide, remove, or censor information can result in increased publicity.
Exclusive publication rights led to significant delays in the release of the texts and encouraged black market sales.
Businesses mechanized operations, reducing overall employment.
Pirates became more organized and formed the “Pirate Republic” in Nassau.
People bricked up windows, leading to poor ventilation and health problems.