The Principal Agent Problem

So, mental models are all the rage
Everyone's trying to become smarter
By adopting mental models
I think mental models are interesting
But I don't think explicitly
In terms of a mental-model checklist
That's just not how I think Instead
I tend to focus on the few lessons
That I've learned in life over and over
That I think are incredibly important
And seem to apply almost universally
One that keeps coming up is
The principal-agent problem

[Chorus]
The principal agent problem
(Say, say, say what?)
The principal agent problem
(Say, say, say what?)

A principal is an owner
An agent is the person who works for the owner
I can summarize this by a famous quote
That either was said by Napoleon or by Julius Caesar
"If you want it done, then go
If not, then send"
If you wanna do something right
Do it yourself
Because other people just don't care enough
Now, the principal-agent problem
Pops up everywhere
The principal's incentives are different
Than the agent's incentives
So the owner of the business
Wants what is best for the business
And will make the most money
The agent generally wants
Whatever will look good to the principal
Or might make them the most friends in the neighborhood
Or might make them personally the most money
Agents have a way of hacking systems

[Chorus]
The principal agent problem
(Say, say what?)
The principal agent Problem
(Oh my God!)

This is what make incentive design so difficult
"If you could be working on incentives"
As Charlie Munger says
"Don't work on anything else"
Almost all human behavior
Can be explained by incentives
The study of signaling is seeing what people do
Despite what they say
People are much more honest with their actions
Than they are with their words
You have to get the incentives right
To get people to behave correctly
It's a very, very difficult problem
The good people aren't purely coin-operated
They're not just looking for money
They're also looking for other things
Like status or meaning
In what they do

[Chorus]
The principal agent problem
(Say what?)
The principal agent problem
(Say what?)

Principal agent problem is the one
That, as a business owner
You're always going to be trying to figure out
"How do I make this person think like me
How do I incent them
How do I give them founder mentality"
If you are a principal
You wanna take your top lieutenants
And you wanna be very generous with them
In terms of ownership and incentives
Even if they don't necessarily realize it
Because, over time, they will
Finally, if you're in a current role
Where you're an agent, you're an employee
Your most important job is to think like a principal
The more you can think like a principal
The better off you're going to be long-term
Because it's training you
How to be a principal long-term
And eventually, you will become a principal
And a good principal will then
Promote you or empower you
Or give you accountability or leverage
Way out of proportion to what might be your menial role

The principal agent problem
(Say, say, say, say what?)
The principal agent problem
(Principal-agent problem)

[Chorus]
The principal agent problem
(S-say, say, say, say what?)
The principal agent problem
(Oh my God!)

So if you can hack your way
Through the principal agent problem
You've probably solved half
Of what it takes to run a company
If you're an agent, the best way to operate
Is just say, "What would the founder do"
If you think like the owner and you act like the owner
It's only a matter of time until you become the owner