Principal-Agent Problem: Act Like an Owner

We spoke earlier about picking a business model that has leverage from scale economies, network effects, zero marginal cost of replication. But there were a few other ideas on the cutting room floor that I want to go through with you.

The first one was 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. I know Charlie Munger does, but 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 from microeconomics, because as we've established, macroeconomics is not really worth spending time on, is what's called the principal-agent problem. Principal in this case is principal with the "P" al, not "ple." So, it's not a principal that you follow; it's a principal who is a person who is an owner. A principal is an owner, and an agent is the person who works for the owner. So, if you can think of it as an employee, the difference being a founder and an employee.

I can summarize this by a famous quote that either was said by Napoleon or by Julius Caesar. It's generally attributed to either one, but he said, "If you want it done, then go; if not, then send," which is basically saying if you want to do something right, do it yourself, because other people just don't care enough.

Now, the principal-agent problem pops up everywhere in microeconomics. The way that they try to characterize it is that the principal's