1. Historical Context
During the period of British rule in colonial India, the city of Delhi suffered from an alarming infestation of poisonous cobras that put the residents of the area in serious danger.
2. The Breakdown Event
To solve the problem, the authorities of the British Empire before Indian self-government established a financial incentive: they would pay a cash reward for each cobra skin surrendered. At first, the measure was a resounding success and citizens hunted thousands of cobras. However, some astute entrepreneurs soon realized that it was much easier and more profitable to breed cobras in captivity to kill for the bounty than to hunt them in the wild. Upon learning of the deception, the colonial government canceled the reward. As a direct result, breeders released all of the worthless cobras they were holding in their hatcheries, causing the wild cobra population to end up being much larger than it was at the start of the program.
3. Global Economic Impact
This event not only exhausted public resources in vain, but also drastically worsened the original public health problem, illustrating how poorly designed government interventions can unleash catastrophic consequences.
Key Financial Lesson (Psychology of Money)
Incentives in economics are extremely powerful but dangerous. If an incentive rewards the wrong metric instead of the desired end result, human nature will tend to exploit the rule for personal gain, making the problem worse.
4. Practical Case or Real Life Example
In 2008, the fee structure of credit rating agencies and Wall Street investment banks incentivized granting high safety ratings (AAA) to subprime mortgages to generate immediate turnover, laying the foundation for the global financial collapse.