No. 120 · People · Systems
Principal-Agent Problem
When someone acts for you, their interests and yours may quietly part ways.
In the Almanac
“Berle and Means”, 1932 · “Olympus”, 2011
Both stories in full, three ways to use it and where it misleads.
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Questions
What is Principal-Agent Problem?
The principal-agent problem appears whenever you delegate: the agent may know more than you and want something different. Berle and Means showed in 1932 that managers, not owners, controlled many of the biggest US firms. An Olympus inquiry found executives hid 1.7 billion dollars of losses.
How do you use Principal-Agent Problem?
To use it, ask how anyone acting for you is paid, tie their reward to your outcome, and agree on simple check-ins. Aim for alignment and transparency, not suspicion.
When does Principal-Agent Problem matter?
Principal-Agent Problem is one of the 60 mental models for people, the situations where you ask: Why do people act as they do, and how do I work with them? Within that, it belongs to “Leading people”, alongside Carrot and Stick, Distributive Justice vs Procedural Justice and Golem Effect.
What is an example of Principal-Agent Problem?
Two stories show it at work: Berle and Means (1932) and Olympus (2011). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.
Which mental models are related to Principal-Agent Problem?
Bias from Incentives, Moral Hazard and Directly Responsible Individuals. Principal-Agent Problem itself comes from systems.