Sahil Bloom Profile picture
Feb 12 19 tweets 4 min read
The Principal-Agent Problem is everywhere.

A universal mental model for startups, business, politics, and life.

Here’s a breakdown of what it is (and why it matters):
What is the Principal-Agent Problem?

Imagine a world divided into:
• Principals—owners
• Agents—employees

The Principal is an owner; the Agent works on behalf of the owner.

The Principal-Agent Problem is a term for the conflicting priorities of the Principal and the Agent.
This is really about incentives.

As an owner, the Principal's incentives are directly aligned with the outcome.

Due to the lack of ownership, the Agent's incentives may be very different—money, status, esteem, etc.

The Principal has skin in the game, but the Agent does not.
In a post on this, @naval references a quote by Napoleon or Caesar:

"If you want it done, then go. And if not, then send."

This is a dramatized illustration of the Principal-Agent Problem.

If you want it done, do it yourself; an agent acting on your behalf won't do it well.
Once you internalize it, you'll start seeing the Principal-Agent Problem pop up all around you.

It wreaks havoc in startups, business, politics, government policy, and more.

To bring this to life, let's look at a few hypothetical examples of the Principal-Agent Problem:
1/ Business

Imagine a public company—Advanced Widgets.

The long-term shareholders of AW are its Principals.

The CEO of AW is their Agent.

The Principals are incentivized by long-term compounded value creation.

The CEO is incentivized by short-term compensation.
Well, we have a potential Principal-Agent Problem:

The CEO has big incentive payouts tied to achieving certain short-term targets.

She may be making short-term decisions to achieve these targets that are detrimental to the long-term value creation of the company.

This is bad!
2/ Startups

Imagine a startup—Widgety.

The founder and CEO is its Principal.

The salesperson is her Agent.

The founder is incentivized by her ownership in the company—its long-term growth.

The salesperson is incentivized by commission checks on new contracts signed.
Again, we have a potential Principal-Agent Problem:

The salesperson has big commission payouts tied to new contracts.

He may be making short-term decisions to earn these payouts—promising the world to customers and not worrying about future customer churn.

This is bad!
3/ Politics

Imagine a country—IncentiveLand.

The people are its Principals.

The president is their elected Agent.

The people are incentivized by the long-term improvement in their quality of life.

The president is incentivized by his continued consolidation of power.
And yet again, we have a potential Principal-Agent Problem:

The president has incentives to act for himself, not the people.

He may be accepting money from big corporations, smearing his enemies, or invading other countries in order to consolidate his power.

This is bad!
"Show me the incentives and I will show you the outcome." — Charlie Munger

As we can see from these—admittedly dramatized—examples, the Principal-Agent Problem is all about incentive and information alignment.

It's about skin in the game.

So how do we manage it and fight back?
Managing the Principal-Agent Problem starts with awareness.

As an owner, you have to be aware of the power of incentives and the potential conflicts they create.

Constant evaluation of incentives is critical for any Principal—as is a willingness to adjust and align as needed.
Ultimately, the focus of a Principal has to be on how to create aligned incentives and instill a deep owner mentality in the Agents.

As Charlie Munger says, "Never, ever, think about something else when you should be thinking about the power of incentives."
As an Agent, your long-term goal might be to become a Principal.

If you want to stand out and optimize your chances of success, you can do so by consistently displaying that you think like an owner.

People who think like owners often achieve accelerated tracks in their careers.
A few key takeaways:

The Principal-Agent Problem is a term for the conflicting priorities of the Principal (owner) and the Agent (employee).

It's about incentives and skin in the game.

Principals should constantly think about incentives; Agents should try to think like owners.
The Principal-Agent Problem is a critical mental model to add to your toolkit.

Follow me @SahilBloom for more threads on mental models, frameworks, and more.

This will be built out into a longer newsletter piece on incentives. Subscribe to get it! sahilbloom.substack.com
We cover a lot of these topics on my new podcast—Where It Happens. You can find us on Apple, Spotify, or YouTube.

You’ll learn something new every single episode. I know I do! podcasts.apple.com/us/podcast/whe…
For more on these topics, I highly recommend the below resources:

nav.al/principal-agent

fs.blog/bias-incentive…

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More from @SahilBloom

Feb 13
10 ways to stand out in a hiring process (that don’t involve your resume):
Do Your Research

Before an interview, spend a few hours researching the company and role.

At a minimum, you should cover:
• Company mission
• Recent company news
• Recent market news
• Backgrounds of leaders
• Backgrounds of interviewers

Google is a powerful asset—use it.
Embrace “I Don’t Know”

You can’t know the answer to every question. And you know what? That’s ok.

Don’t be afraid to say “I don’t know”—but follow it with a plan to acquire that information.

Ex: “I don’t know, but I’ll dig in and follow up via email.”

Then actually follow up!
Read 14 tweets
Feb 12
5 simple ways to increase your luck:

(1) Talk to more new people—go out instead of staying in.

(2) Send more cold emails and DMs.

(3) Write and share in public.

(4) Actively participate in digital communities.

(5) Spend more time in rooms where you’re the dumbest person.
I’ve written about “engineered serendipity” in the past. The idea that you can create or manufacture some luck.

This is closely related with the idea of “luck surface area” as well.

I’ve been trying to write a more comprehensive piece on the topic—I think it’ll eventually flow.
Ok, got some whiskey in me and the ideas are starting to flow. This thread should come together tomorrow or next week.

I guess you can follow me @SahilBloom so you don’t miss it.

Might mess around and drop 500,000 lessons learned when I hit 500,000 on here, too.
Read 4 tweets
Feb 11
The formula for an effective cold startup pitch email:
My friend @Julian posted a thread with a number of investors that are open to receiving cold pitches.

I got 100+ emails from the thread—which is awesome—but I noticed that some emails grabbed and held my attention more than others.

Here’s a formula for what works:
High-Conversion Subject Line

The subject line of the email is the first chance to hook them.

It should be concise and infuse any social proof you might have.

Example: “[Startup Name] — YC-Backed Neobank for India”

Example: “[Startup Name] — Sales Tech SaaS, 30% MoM Growth”
Read 11 tweets
Feb 10
💥New Episode💥

Forget Zero-Sum, Be Positive-Sum with @harleyf

- How they changed e-comm forever
- New e-comm business ideas
- Elements of entrepreneurial DNA
- 5 year predictions
- Morris Chang, TSMC, & Shopify

You won’t want to miss this one. Links to the episode below!
And join our 4,000+ person Discord channel to go deeper and connect with other tech and growth-minded individuals! discord.gg/CKGN9MEQ
Read 4 tweets
Feb 10
Tomorrow marks my 40th consecutive week of sending out The Friday Five. Relentless consistency.

It’s 5 pieces of content to spark your curiosity:

1 Quote
1 Tweet
1 Article
1 Podcast
1 Bonus

You’ll learn something new each week.

Join 69,000+ (👀) others and sign up below!👇
We overestimate what we can accomplish in a day, but underestimate what we can accomplish in a year.
Read 5 tweets
Feb 9
How to retain what you learn:
Growth is driven by the accumulation and compounding of usable learning.

We accumulate and compound this learning through consumption and retention.

Consumption is the inputs—retention is what remains after leakage.

This thread shares my simple framework for retention:
The retention framework I use involves five steps:

• Inspired Consumption
• Unstructured Note-Taking
• Consolidation
• Analogize
• Idea Exercise

The structure is sequential, but its practice is often dynamic & iterative.

Let's walk through each of the steps...
Read 11 tweets

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