We spoke earlier about picking a business model that has leverage from scale economies, network effects, zero marginal cost of replication.

There were a few other ideas on the cutting room floor that I want to go through with you. The first one was the principal agent problem.

So mental models are all the rage. Everyone's trying to become smarter by adopting mental models.

I think mental models are interesting, but I don't think explicitly in terms of a mental model checklist. I know Charlie Munger does, but that's just not how I think.

Instead, I tend to focus on the few lessons that I've learned in life over and over that are think are incredibly important and seem to apply almost universally.

One that keeps coming up from microeconomics, because as we've established macroeconomics is not really worth spending time on, is what's called the principal agent problem.

The principal in this case is principal with a P-A-L, not P-L-E, so it's not a principal that you follow. It's a principal who is a person. A principal is an owner.

An agent is the person who works for the owner. So you can think of it as an employee, the difference between a founder and an employee.

I can summarize this by a famous quote that either was said by Napoleon or by Julius Caesar. It's generally attributed to either one.

But he said, if you want it done, then go. If not, then send.

Which is saying, if you want to do something right, do it yourself, because other people just don't care enough.

Now, the principal agent problem pops up everywhere. In microeconomics, the way that they try to characterize it is that the principal's incentives are different than the agents' incentives.

So the owner of the business wants what is best for the business and will make the most money. The agent generally wants whatever will look good to the principal or might make them the most friends in the neighborhood or in the business or might make them personally the most money.

You see this a lot with hired gun CEOs running public companies where the ownership of the public company is distributed so widely that there's no principal remaining.

So nobody owns more than one percent of the company. The CEO takes charge, stuffs the board with their buddies and then starts issuing themselves low price stock options or doing a lot of stock buybacks because their compensation is based directly tied to the stock price.

So agents have a way of hacking systems. This is what makes incentive design so difficult. As Charlie Munger says, if you can be working on incentives, don't work on anything else.

Almost all human behavior can be explained by incentives. The study of signaling and signals is seeing what people do despite what they say. People are much more honest with their actions and they are with their words.

You have to get the incentives right to get people to behave correctly. It's a very, very difficult problem because the good people aren't purely coin operated. They're not just looking for money, they're also looking for other things like status or meaning in what they do.

The principal agent problem is the one that as a business owner, you're always going to be trying to figure out how do I make this person think like me? How do I incent them? How do I give them founder mentality?

And I think you have to truly have been a founder to fully appreciate how important this founder mentality thing is and what a difficult and gnarly problem the principal agent problem is.

What I would say to you is if you are a principal, you essentially want to spend a lot of your time thinking about this problem.

What that means is you want to take your top lieutenants and you want to be very generous with them in terms of ownership and incentives, even if they don't necessarily realize it because over time they will and you want them to be aligned with you in how they operate.

...