naval ravikant

The Naval Podcast | Principal-Agent Problem: Act Like an Owner

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This podcast clip is part of a conversation between Naval Ravikant and Babak Nivi. Unless otherwise noted, quotes are from Naval. For reference, check out Naval’s famous How to Get Rich tweet storm.

Key Takeaways

  • If you want something done right, do it yourself
  • Almost all human behavior can be explained by incentives
  • Incentives must be aligned in order to get people to behave correctly
  • Think like a business owner in order to become a business owner

What’s the principal-agent problem?

  • Principal = business owner
  • Agent = an employee
  • Here’s the problem – the principal’s incentives are different from the agent’s incentives
    • The business owner wants what’s best for the business and will make the most money
    • The agent wants whatever will look good to the principal or might personally make him/her the most money
  • “If you want to do something right, do it yourself, because other people just don’t care enough”

You Have to Get the Incentives Right in Order to Get People to Behave Correctly

  • Almost all human behavior can be explained by incentives
  • If you’re a principal, think carefully about how you can be generous with your lieutenants in regards to ownership and incentives (you want them to be aligned with you in how they operate)
  • “If you’re an agent or employee, your most important job is to think like a principal”
    • This trains you how to become a principal long-term

Work With the Smallest Firms Possible

  • In larger firms, the principal and agent are too separated
    • The principal will very often sell you on working with the firm, but the work will then be done by an agent who simply doesn’t care as much
  • “I prefer to work with boutiques. My ideal law firm to work with is a law firm of one. My ideal banker to work with is a solo banker.”

Let’s Sum This Up

  • “If you are an agent, the best way to operate is to just say, ‘What would the founder do?’ If you think like the owner and you act like the owner, it’s only a matter of time until you become the owner”

Additional Notes

  • Realize – “People are much more honest with their actions than they are with their words”
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