Principal-Agent Problem

When a person acts on behalf of others the problem occurs when the agent acts in their own self-interest which is counter to the best interest of those they act on behalf of (principals) because of diverging interests and asymetric information (agent knows something the principals don’t). Examples include politicians, CEO’s, brokers, even doctors, etc.

Venture capitalists and institutional investors need big returns and therefore they fund companies pursuing a big market (investor returns follow a power law). Fund sizes have increased and investors need larger and larger returns. However, there is a tension with founders’ incentives to have a wide range of exit outcomes. An exit in the $100s of millions is life changing for a founder, but not a good enough outcome for investors. Investors are incentivized to push founders to riskier, but bigger opportunities even if the set of possible positive outcomes for the founder are significantly smaller (e.g. a highly competitive winner-takes-all market).

There are three groups of people within an organization: Sociopaths (tend to be at the top running the company, characterized by self-interest and need to control), Clueless (tend to be middle management, characterized by misplaced loyalty to the organization), and Losers (tend to be at the bottom, characterized by striking a bad economic bargain). The Gervais Principle speaks to the dynamics between these three groups with the Office as allegory.

Shared resources used by individuals with no ownership end up depleting it. Common examples include fishing (over-fishing) and forests (deforestation).