HOW TO GET RICH WITHOUT GETTING LUCKY
The principal-agent problem is one of the most important concepts in economics, and it explains a huge amount of dysfunction in business and society.
Hereâs the setup: the principal is the person who owns something or wants something done. The agent is the person hired to do it. The problem? Their incentives arenât aligned.
Examples everywhere:
- A real estate agent wants to close the deal quickly (their commission doesnât change much between a good and great price). You want the best possible price. Misaligned.
- A fund manager takes 2% of assets regardless of performance. Theyâre incentivized to gather more assets, not necessarily to generate better returns. Misaligned.
- An employee is paid the same whether they do excellent or mediocre work (mostly). The owner bears the consequences of quality. Misaligned.
Navalâs insight: the solution is to act like an owner even when youâre an agent. This does two things:
- It makes you more valuable (owners notice and reward people who think like owners)
- It builds the mindset you need when you eventually become an owner yourself
How to act like an owner:
- Care about the companyâs money as if it were yours
- Think about long-term consequences, not just short-term tasks
- Take responsibility for outcomes, not just activities
- Make decisions youâd be comfortable with if your name was on the building
The structural solutions: equity compensation (give agents ownership), transparent metrics (make it hard to hide), and reputation systems (your track record follows you).
When hiring or partnering: design incentive structures that align everyoneâs interests. The best partnerships are the ones where everyone wins when the project wins.
Related: Take Accountability to Earn Equity, We Should All Be Working for Ourselves