Back to the Principal-Agent problem we chatted about on Day 11.

Information asymmetry is thought to exacerbate the Principal-Agent risk of moral hazard. The Agent is the boots-on-the-ground person, so they know more than the Principal.  Information asymmetry is instructive for the basic model and thought experiment, but it understates the effect of the problem when there are multiple overlapping and interlocking Principals and Agents.  That’s the case in 100% of large organizations.

We can think about this in several ways.  If we have one Principal and one Agent, we have a 2×2 matrix of possible interactions (P/A vs. high/low effort).  If we have (say) dozens of Principals and Agents we have a hypercomplex NxMxO matrix with a vast and inscrutable array of combinatorial outcomes.  If it sounds confusing, that’s because it is!

Based on this real world complexity, we ought to think about information opacity in addition to information asymmetry.  Not only does the left hand not know what the right hand is doing;  neither hand really knows how many other hands, or feet, or tentacles—as they used to say on the Disneyland Star Wars ride—there are, nor what they’re doing, nor what their notional incentives and interests are.

This is a fundamental dynamic of large organizations and bureaucracies.  They’re slow and complex so that they can continue to function in the face of all these complex interrelationships.  It sure can be frustrating too.  It speaks to why leadership and clarity of purpose, vision, and values are so critical to keep everyone rowing in the same direction as much as possible.  Conversely it’s worth paying attention when for whatever set of reasons, an organization isn’t doing this and is dysfunctional.  You may not want to get embroiled in all the inward-looking drama in that case.

-Chris

P.s. for fact checkers:  the show is called The Dukes of Hazzard (with 2 Zs!)