9 ms·

And congratulations to any of today's lucky ten thousand who are just learning of the Principal-Agent Problem. https://en.wikipedia.org/wiki/Principal%E2%80%93

by Y_Y 1y ago

And congratulations to any of today's lucky ten thousand who are just learning of the Principal-Agent Problem. https://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...

trollbridge 1y ago
And watch out for troublesome agents who often propose themselves as the answer to the principal-agent problem they created in the first place.
airstrike 1y ago
How about the ten thousand learning about "today's lucky ten thousand"?
- wyre 1y ago
  https://xkcd.com/1053/ https://xkcd.com/1053/
phil21 1y ago
I'm convinced that a great majority of problems in the US these days fundamentally boils down to principal agent problems. The 2008 financial crisis is a great example. Once banks no longer kept mortgages on their own books, it just became a matter of time until that was going to blow up. The incentives change.
- breatheoften 1y ago
  It takes more than just misaligned incentives to get a banking crisis -- you have to have structural corruption preventing the transfer of the loss gradient back to the "misaligned" decision makers. It's somewhat disingenuous (or overly innocent) to reimagine the pathways which power structural corruption as "innocent ignorance in the face of bad incentives". The real world has "actually bad" actors -- not just misaligned incentives.
  - hotstickyballs 1y ago
    I disagree with the characterization of structural corruption. Every rationale actor will seek to capture all the benefits and pass on the risks. The real corruption is when decision makers know that they can’t be held responsible through corporate or political structures. See also [moral hazard](https://en.m.wikipedia.org/wiki/Moral_hazard https://en.m.wikipedia.org/wiki/Moral_hazard)
  - csomar 1y ago
    Try to think of corruption as inefficiency to get the desired effect instead of some dude accepting some money under the table. Sometimes a dude getting some money does not yield the worst outcome which is why some countries still run despite the corruption.
  - AnthonyMouse 1y ago
    > It takes more than just misaligned incentives to get a banking crisis -- you have to have structural corruption preventing the transfer of the loss gradient back to the "misaligned" decision makers. Nah, you can do it just on the basis of information asymmetries. Banks can sell mortgages. People think buying mortgages is safe, because banks don't loan money to people they don't think can pay it back, and even if they did, the mortgage is backed by the house so in the worst case you can foreclose and get back your principal. So lots of people buy mortgages. Then banks figure out that it's easy to sell mortgages, and that if they sell them it doesn't matter that much if the people they loan the money to can pay it back. Plus, the less creditworthy people pay higher interest rates, and you can still foreclose if they default. So banks make a lot of loans to people who can't afford them, and then sell the mortgages, and people still buy them. Except that if this happens at scale, the people taking out mortgages they can't afford bid up the price of houses. And then when they start to default and you want to foreclose, you'd have to sell the house to get back the money, which at scale means that the prices would go back down to where they were before they got bid up, which means you wouldn't even recover your principal. If everybody realizes that this is what's going to happen then people wouldn't buy bad mortgages from banks and then banks wouldn't issue them. But if enough people don't notice until after the bubble is inflated...
- doctorpangloss 1y ago
  Your personal life is abundant with meaningful human activity that cannot at all be explained by money incentives. The principal agent problem has this same problem: once we stop talking about money, “interests” can be vague and overlapping, making the problem disappear with scrutiny. To me, a great majority of problems in the US fundamentally boils down to people looking for markets and money where there aren’t any. Great examples include rising healthcare costs (what is the right price to pay for saving a child’s life, for example? Culturally, it’s basically unlimited!) whereas rising legal costs are NOT seen as a crisis (suing other people over BS grievances, unlike saving lives, is not compulsory); infrastructure investment (cars don’t make financial sense everywhere and everything all the time, but they’re REALLY cozy, so we will spend exorbitant amounts of money on infrastructure for them compared to everything else); the obesity crisis (eating feels GOOD, even if it costs EXORBITANT amounts of money); worsening education outcomes; lack of growth of alternatives to single family homes…
  - AnthonyMouse 1y ago
    > To me, a great majority of problems in the US fundamentally boils down to people looking for markets and money where there aren’t any. Your examples are mostly things where there are, though, e.g.: > rising healthcare costs (what is the right price to pay for saving a child’s life, for example? Culturally, it’s basically unlimited!) This is confusing value with cost. If you had to pay a million dollars to save a child's life, maybe that's worth it, but that's not the problem. The problem is that so often we could have saved the child's life for $100 but for various bad reasons it ends up being $100,000 instead, and the people getting the other $99,900 want to keep it that way. > whereas rising legal costs are NOT seen as a crisis (suing other people over BS grievances, unlike saving lives, is not compulsory) Isn't the problem with the rising legal costs mostly on the defense side? You can't prevent someone from filing an unmeritorious lawsuit against you, or avoid hiring compliance lawyers to tell you what to do to prevent that from happening, so it matters when those things get more expensive. But then the compliance lawyers and their lobbyists like it to get more expensive because they're the ones getting the money. > infrastructure investment (cars don’t make financial sense everywhere and everything all the time, but they’re REALLY cozy, so we will spend exorbitant amounts of money on infrastructure for them compared to everything else) People who hate cars say this but we mostly spend money on cars because everything is too spread out for mass transit, which brings us to this one: > lack of growth of alternatives to single family homes Markets are great at solving this. If it wasn't literally banned in most of the relevant places, developers would be replacing single family homes with higher density housing all over and people would be buying it. > the obesity crisis (eating feels GOOD, even if it costs EXORBITANT amounts of money) Government subsidizes the production of high fructose corn syrup, which does this: https://www.princeton.edu/news/2010/03/22/sweet-problem-princeton-researchers-find-high-fructose-corn-syrup-prompts https://www.princeton.edu/news/2010/03/22/sweet-problem-prin... > worsening education outcomes And then people make school choice arguments. Which one of these isn't a situation where we would benefit from a competitive market but the existing laws prevent us from having one?
- simianwords 1y ago
  You are right but in a roundabout way. It’s true that most problems in US can be explained by this but it’s also true that the west and US particularly are successful because they can bypass the principal agent problem to an extent. You just have to look at India or Africa a bit to understand the severity to which this problem permeates day to day in these countries.
  - mellow_observer 1y ago
    That's an interesting line of thought. How would you say the US/west are able to bypass this problem more effectively?
    - simianwords 1y ago
      No matter how poorly one thinks of westerners and their leaders, it is clear that in general they can look beyond themselves and their immediate surroundings when optimising their impact. The same cannot be said about Indians and other poor people from poor countries. Their optimisation lies solely on themselves or immediate family. This has consequences at every level and even at the political level.
      - devsda 1y ago
        It is just the case that the west and its leaders have had the luxury of choice and have only seen relative poverty but not absolute poverty for various reasons. When your are poor and basic necessities are difficult to meet, its natural to optimize for self and not care about the big picture.
        zarathustreal 1y ago
        This may explain the phenomenon but it certainly doesn’t excuse it - just because something is natural doesn’t mean it’s smart or morally correct
        anal_reactor 1y ago
        This is not correct. First, in crisis situations people tend to cooperate more, even though naive model predicts that people would act in self-interest. Second, there have been cases of countries that collectively decided not to be poor, and they stopped being poor once external pressure has been removed. Case in point is a huge part of Eastern Europe after the fall of communism.
theologic 1y ago
Throw in confirmation bias https://en.wikipedia.org/wiki/Confirmation_bias https://en.wikipedia.org/wiki/Confirmation_bias and you have a lot of inertia from changing. Not only do they not have the right info, but because they have invested in the ongoing solution, it is difficult to get any change going because humans tend to simply see everything as supporting their current viewpoint.
hackernewds 1y ago
there's no reason to be patronizing or condescending
- vasco 1y ago
  This is an example of the agent thinking it has to defend the principal but misunderstanding context.
- Aloisius 1y ago
  It's an xkcd reference. Sadly, not explicitly mentioning it is xkcd sends the exact opposite message to the one in the comic to those unaware of it. https://xkcd.com/1053/ https://xkcd.com/1053/
pyaamb 1y ago
You've got me wondering about if and to what extent AI could alter the dynamic
- immibis 1y ago
  AI is used by agents to rationalize to principals why they're not actually being scammed.
cptnapalm 1y ago
I didn't know this had a name! Thank you!

by Y_Y 1y ago

trollbridge 1y ago

And watch out for troublesome agents who often propose themselves as the answer to the principal-agent problem they created in the first place.

airstrike 1y ago

How about the ten thousand learning about "today's lucky ten thousand"?

wyre 1y ago
https://xkcd.com/1053/ https://xkcd.com/1053/

phil21 1y ago

I'm convinced that a great majority of problems in the US these days fundamentally boils down to principal agent problems. The 2008 financial crisis is a great example. Once banks no longer kept mortgages on their own books, it just became a matter of time until that was going to blow up. The incentives change.

breatheoften 1y ago
It takes more than just misaligned incentives to get a banking crisis -- you have to have structural corruption preventing the transfer of the loss gradient back to the "misaligned" decision makers. It's somewhat disingenuous (or overly innocent) to reimagine the pathways which power structural corruption as "innocent ignorance in the face of bad incentives". The real world has "actually bad" actors -- not just misaligned incentives.
- hotstickyballs 1y ago
  I disagree with the characterization of structural corruption. Every rationale actor will seek to capture all the benefits and pass on the risks. The real corruption is when decision makers know that they can’t be held responsible through corporate or political structures. See also [moral hazard](https://en.m.wikipedia.org/wiki/Moral_hazard https://en.m.wikipedia.org/wiki/Moral_hazard)
- csomar 1y ago
  Try to think of corruption as inefficiency to get the desired effect instead of some dude accepting some money under the table. Sometimes a dude getting some money does not yield the worst outcome which is why some countries still run despite the corruption.
- AnthonyMouse 1y ago
  > It takes more than just misaligned incentives to get a banking crisis -- you have to have structural corruption preventing the transfer of the loss gradient back to the "misaligned" decision makers. Nah, you can do it just on the basis of information asymmetries. Banks can sell mortgages. People think buying mortgages is safe, because banks don't loan money to people they don't think can pay it back, and even if they did, the mortgage is backed by the house so in the worst case you can foreclose and get back your principal. So lots of people buy mortgages. Then banks figure out that it's easy to sell mortgages, and that if they sell them it doesn't matter that much if the people they loan the money to can pay it back. Plus, the less creditworthy people pay higher interest rates, and you can still foreclose if they default. So banks make a lot of loans to people who can't afford them, and then sell the mortgages, and people still buy them. Except that if this happens at scale, the people taking out mortgages they can't afford bid up the price of houses. And then when they start to default and you want to foreclose, you'd have to sell the house to get back the money, which at scale means that the prices would go back down to where they were before they got bid up, which means you wouldn't even recover your principal. If everybody realizes that this is what's going to happen then people wouldn't buy bad mortgages from banks and then banks wouldn't issue them. But if enough people don't notice until after the bubble is inflated...
doctorpangloss 1y ago
Your personal life is abundant with meaningful human activity that cannot at all be explained by money incentives. The principal agent problem has this same problem: once we stop talking about money, “interests” can be vague and overlapping, making the problem disappear with scrutiny. To me, a great majority of problems in the US fundamentally boils down to people looking for markets and money where there aren’t any. Great examples include rising healthcare costs (what is the right price to pay for saving a child’s life, for example? Culturally, it’s basically unlimited!) whereas rising legal costs are NOT seen as a crisis (suing other people over BS grievances, unlike saving lives, is not compulsory); infrastructure investment (cars don’t make financial sense everywhere and everything all the time, but they’re REALLY cozy, so we will spend exorbitant amounts of money on infrastructure for them compared to everything else); the obesity crisis (eating feels GOOD, even if it costs EXORBITANT amounts of money); worsening education outcomes; lack of growth of alternatives to single family homes…
- AnthonyMouse 1y ago
  > To me, a great majority of problems in the US fundamentally boils down to people looking for markets and money where there aren’t any. Your examples are mostly things where there are, though, e.g.: > rising healthcare costs (what is the right price to pay for saving a child’s life, for example? Culturally, it’s basically unlimited!) This is confusing value with cost. If you had to pay a million dollars to save a child's life, maybe that's worth it, but that's not the problem. The problem is that so often we could have saved the child's life for $100 but for various bad reasons it ends up being $100,000 instead, and the people getting the other $99,900 want to keep it that way. > whereas rising legal costs are NOT seen as a crisis (suing other people over BS grievances, unlike saving lives, is not compulsory) Isn't the problem with the rising legal costs mostly on the defense side? You can't prevent someone from filing an unmeritorious lawsuit against you, or avoid hiring compliance lawyers to tell you what to do to prevent that from happening, so it matters when those things get more expensive. But then the compliance lawyers and their lobbyists like it to get more expensive because they're the ones getting the money. > infrastructure investment (cars don’t make financial sense everywhere and everything all the time, but they’re REALLY cozy, so we will spend exorbitant amounts of money on infrastructure for them compared to everything else) People who hate cars say this but we mostly spend money on cars because everything is too spread out for mass transit, which brings us to this one: > lack of growth of alternatives to single family homes Markets are great at solving this. If it wasn't literally banned in most of the relevant places, developers would be replacing single family homes with higher density housing all over and people would be buying it. > the obesity crisis (eating feels GOOD, even if it costs EXORBITANT amounts of money) Government subsidizes the production of high fructose corn syrup, which does this: https://www.princeton.edu/news/2010/03/22/sweet-problem-princeton-researchers-find-high-fructose-corn-syrup-prompts https://www.princeton.edu/news/2010/03/22/sweet-problem-prin... > worsening education outcomes And then people make school choice arguments. Which one of these isn't a situation where we would benefit from a competitive market but the existing laws prevent us from having one?
simianwords 1y ago
You are right but in a roundabout way. It’s true that most problems in US can be explained by this but it’s also true that the west and US particularly are successful because they can bypass the principal agent problem to an extent. You just have to look at India or Africa a bit to understand the severity to which this problem permeates day to day in these countries.
- mellow_observer 1y ago
  That's an interesting line of thought. How would you say the US/west are able to bypass this problem more effectively?
  - simianwords 1y ago
    No matter how poorly one thinks of westerners and their leaders, it is clear that in general they can look beyond themselves and their immediate surroundings when optimising their impact. The same cannot be said about Indians and other poor people from poor countries. Their optimisation lies solely on themselves or immediate family. This has consequences at every level and even at the political level.
    - devsda 1y ago
      It is just the case that the west and its leaders have had the luxury of choice and have only seen relative poverty but not absolute poverty for various reasons. When your are poor and basic necessities are difficult to meet, its natural to optimize for self and not care about the big picture.
      - zarathustreal 1y ago
        This may explain the phenomenon but it certainly doesn’t excuse it - just because something is natural doesn’t mean it’s smart or morally correct
      - anal_reactor 1y ago
        This is not correct. First, in crisis situations people tend to cooperate more, even though naive model predicts that people would act in self-interest. Second, there have been cases of countries that collectively decided not to be poor, and they stopped being poor once external pressure has been removed. Case in point is a huge part of Eastern Europe after the fall of communism.

theologic 1y ago

Throw in confirmation bias https://en.wikipedia.org/wiki/Confirmation_bias https://en.wikipedia.org/wiki/Confirmation_bias and you have a lot of inertia from changing. Not only do they not have the right info, but because they have invested in the ongoing solution, it is difficult to get any change going because humans tend to simply see everything as supporting their current viewpoint.

hackernewds 1y ago

there's no reason to be patronizing or condescending

vasco 1y ago
This is an example of the agent thinking it has to defend the principal but misunderstanding context.
Aloisius 1y ago
It's an xkcd reference. Sadly, not explicitly mentioning it is xkcd sends the exact opposite message to the one in the comic to those unaware of it. https://xkcd.com/1053/ https://xkcd.com/1053/

pyaamb 1y ago

You've got me wondering about if and to what extent AI could alter the dynamic

immibis 1y ago
AI is used by agents to rationalize to principals why they're not actually being scammed.

cptnapalm 1y ago

I didn't know this had a name! Thank you!