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{{a|design| | {{a|design| | ||
{{image|Secret agent problem|png|A special agent’s problem, yesterday}}}}{{dpn|/ˈeɪʤənsi ˈprɒbləm /|n}} | {{image|Secret agent problem|png|A special agent’s problem, yesterday}}}}{{dpn|/ˈeɪʤənsi ˈprɒbləm /|n}} | ||
The intrinsic [[conflict of interest]] any [[agent]] faces that, as long as it gets its [[commission]], it doesn’t really care a hill of beans what its [[principal]] gets, however much it might protest to the contrary. | |||
Being little more than an illustration of the [[prisoner’s dilemma]], this shouldn’t surprise anyone. It ''should'' be cured where the agency has a repetitive, undated nature:<ref>In which case the game is an [[Iterated prisoner’s dilemma|“iterated” prisoner’s dilemma]].</ref> clients have long memories and will remember when you rip them off. | |||
But the [[prisoner’s dilemma]] has some natural limits: one is that it relies on repeated interactions with no, or least an indeterminate, end-point: the promise of another opportunity, on another day, to clip her ticket keeps an agent, literally, honest. Until the sky is falling on her head, at which point it looks like a final interaction, and the calculus is different. It is a regrettable, but inevitable, fact that agents behave differently at the [[end of days]]. | |||
Second, it takes no account of “[[convexity]]” effects that can arise during an agency relationship: I can build up my reputation incrementally, faithfully carrying out thousands of ''small'' transactions — I can make myself ''look'' like a consistent, five-star collaborator — only to whip away the rug the one time I enter a big transaction. I can sell ten thousand ball-point pens in utmost good faith, but run off with the money the one time I go to sell a Ferrari. | |||
Thus, the agency problem is the classic “[[skin in the game]]” problem: an agent gets paid, no matter what. The [[investment manager]] puts no capital up, takes a small slice of ''yours'', by way of a fee, no matter what. | When that one outsized “defection” drowns out all the thousands of penny-sized collaborations, an iterated game of prisoner’s dilemma effectively becomes a [[single round prisoner’s dilemma|single round]] game, for which the option payoff is markedly different. This is what {{author|Nassim Nicholas Taleb}} calls the “Rubin Trade”. | ||
Thus, the agency problem is the classic “[[skin in the game]]” problem: an agent gets paid, ''no matter what''. The [[investment manager]] puts no capital up, takes a small slice of ''yours'', by way of a fee, ''no matter what''. | |||
Nice work if you can get it. A lot of people in the city can get it. | Nice work if you can get it. A lot of people in the city can get it. |