AREA Method: Kernels of Truth

By June 22, 2016Blog

Recently I read an article on the Farnam Street blog called Incentives Gone Wrong: Cobras, Severed Hands and Shea Butter that recounts two historical events that nicely demonstrate the importance of perspective-taking. The author writes:

“During British colonial rule of India, the government began to worry about the number of venomous cobras in Delhi, and so instituted a reward for every dead snake brought to officials. Indian citizens dutifully complied and began breeding venomous snakes to kill and bring to the British. By the time the experiment was over, the snake problem was worse than when it began.”

Conclusion: Be careful what you ask for; you just may get it! We can’t assume that people will respond the way we intend them to in part because we are all motivated – at least in part- by our own self-interest. That’s why perspective-taking is so powerful. It forces us to become aware of other people’s viewpoints. It both helps us to better understand our own biased thinking and can prevent us from making poor decisions. It reveals misaligned incentives.

The blog also contained another illustrative example. It recalled an anecdote from the book Out of Poverty: And Into Something More Comfortable by John Stackhouse who spent time in Ghana in the 1990s, and noticed that the “socially conscious” retailer The Body Shop was a big buyer of Ghanian shea nuts. The Body Shop used the nuts to produce shea butter, a key ingredient in a variety of its skin products. As part of its socially conscious mission and its role in the Trade, Not Aid campaign, The Body Shop decided to pay above-market prices to Ghanian farmers, offering a 50% premium above the going rate and a bonus payment for every kilogram of shea butter purchased to be used for local development projects at the farmers’ discretion. Result: Farmers ramped up production of shea butter. Stackhouse describes the result in his book:

“A shea-nut rush was on, and neither the British chain nor the aid agencies were in a position to absorb the glut. In the first season, the northern villages, which normally produced two tonnes of shea butter a year, churned out twenty tonnes, nearly four times what the Body Shop wanted….Making matters worse, the Body Shop, after discovering it had overestimated the international market for shea products, quickly scaled back its orders for the next season. In Northern Ghana, it wasn’t long before shea butter prices plunged.

Despite good intentions, The Body Shop’s plan had a bad outcome: Supply overwhelmed demand and it hurt the poor farmers that the company was trying to help. Ghanian shea nuts ended up being mostly worthless.

Incentives matter. We need to consider our own and those of others. When we take into account what matters to the people we deal with in both our personal and professional lives, we will not only communicate more effectively, but we can engage with empathy and make better decisions. It reminds us that to see something clearly we’ve got to crack the nuts to get to the kernel. That’s the rationale behind the AREA Method.

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