Creating a better operations environment by thinking abstractly, using agency

I am watching Gabe Newell again in his talk to LBJ school. I owe much of my career change as if it wasn't for Gabe I would not have left Apple to go to Microsoft in 1992. Now some of you may say that if I had stayed at Apple in 1992 i would be better off than going to Microsoft, but the chances of my staying at Apple after 1992 were slim.

And one of the nuggets is how does Valve make decisions on what to do to make better games. at the 28m mark is where Gabe shares Valves insight.

Below is written explanation.

This idea is powerful, because it is a good abstraction. i plan on using this.

Economics is really human behavior/psychology dressed up in fancy technical language. A lot of it is actually fairly common-sense, once you get past the language.

Here, specifically, “agency costs” refers to the principal-agent problem, aka, the agency problem.

In common terms, the principal-agent problem is, how do you (the principal) get someone (the agent) to do something that you want, instead of something that they want.

So if you (the principal) own a business and hire an employee (agent), how do you get the employee to do things to advance your company’s interests rather than their own? For example, you can try to reward someone with power and responsibility to motivate them to do well (that’s in your interest), but if you structure it wrong, they can play the system so that they look good and get the reward while doing things that hurt the company. An example of this would be the bonuses paid to bankers—in theory, they are supposed to reward people for doing good for the company and align their interests with that of ours, but because of the messed-up way performance is measured (and also the lack of a disincentive to not do bad things), it just ends up encouraging people to do shady and risky things that ultimately bankrupt the company while they walk away with huge bonuses.

The agency problem is everywhere. The classic textbook example is of the real estate agent. In theory, by giving them a percentage commission on the sale, you are encouraging them to get as good of a price as possible since the better the price, the better their commission. But after a certain point, they’ll decide that it’s no longer worth spending an extra month of their time to get a small percent of a somewhat better selling price, at which point, their interests (in getting the sale over with, because they have better things to do) supersede your interest (in getting the best possible price).

And it’s in politics, too, where politicians are (supposed to be) the agents of citizens. I don’t think I need to explain this one—it is clearly one area where the agency problem is... quite severe.

Anyway, a good manager is one that’s able to identify and analyze the agency problem and find a good solution to it (there usually isn’t a perfect solution—you try to find the solution with the best balance of upside vs. downside). And many people don’t have a good grasp of this (again, look at the BS that goes on in the financial markets—the principals are almost always getting screwed).