October 15th, 2020

You're the Principal of Your Life

The Principal–Agent Problem occurs when one person or entity (the Agent) is taking actions on behalf of another (the Principal), and there is a disconnect between the best interests of the two. This happens when the incentive structures of the relationship don't support the alignment of said interests. The most obvious example is that of an hourly worker performing some task — it is not in their best interests to work as hard as humanly possible. Their compensation is not dependent on it. They'll probably exert reasonable enough effort to avoid getting too bored or fired, depending on their work ethic.

Naval Ravikant sums it up nicely with a quote often attributed to Julius Caesar, Napoleon or Benjamin Franklin:

If you want it done, go. If not, send.

Illustration of the Principal-Agent Problem

The Principal–Agent Problem mostly comes up in relation to business and economics, but it's a useful heuristic when thinking about personal goals and ambitions. When it comes to the truly important areas of life, we must remember that as Principals, we should think hard before we delegate to an Agent whose agenda might be different to ours.

To illustrate an example, let's come back to Naval and look at a piece of wisdom from his Life Formulas I:

Happiness = Health + Wealth + Good Relationships

The first two are great examples of where the problem applies. We can throw money at gyms, personal trainers and dieticians in pursuit of better health, but for any of it to be effective, we as the Principals must be fully committed to the outcomes we want. We can hire a financial advisor to manage our assets, but the results can be much better if we eliminate unnecessary spending, actually learn how money works, and can critically analyse the advice we're given.

All that said, Agents aren't always bad. We can't do everything on our own and we should certainly use professional help and expertise where it's warranted. But ultimately, we're the ones responsible and should be sceptical of incentive structures that don't support our best interests.

© Siim Männart 2021