https://www.wannapik.com/vectors/24131
The Pitch.
- Is your car as old as the Mona Lisa?
- Does it spew more pollution than a petrochemical plant?
- When you turn your windshield wipers on, does it turn your car off?
- Have you ever thought about blasting your car with a tank shell, so you can finally buy another one?
Well, we have a deal for you.
I’m Carl. And here at Best Deals Auto, we’re going out of business, and that means we’re giving every car away, practically for FREEEEE!
We have every used car available; from trucks, to SUVs, to cars big and small, we even have a boat or two, because we know you have needs, and we're here to fulfill those needs.
No money, no problem. Our fully trained staff will offer you an affordable credit option that fits your lifestyle. Why? Because you deserve it!
So come on by, we're not that far away. But hurry, I don't know how long we'll still be in business.
The Principal-Agent Problem.
I bet we've all heard this sales pitch before. And it gives us a warm and fuzzy feeling inside. Or maybe it's a nauseous feeling. I don't know. Lets begin.
"The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal" (Investopedia).
In the example above, the principal is you and the agent is Carl. And “affordable credit option that fits your lifestyle,” is the operative phrase for the principal-agent problem.
Uncle Carl.
My Uncle Carl is a very likable guy. He not only makes you feel good about yourself, you can talk to him about pretty much anything. Qualities he used effectively as a car salesman.
I asked him recently if he knew what the “principal-agent problem” was because I was writing a post about it.
He said, “of course I do, our business model depends on it.” He then began to elaborate...
Two things you need...
He said there's two things you need to know & do to establish a principal-agent problem...
To Know:
Most people already know what they want.
But they don't have the money to buy it.
To Do:
Tell people you have what they want.
And make sure they have the credit to buy it.
The Credit to buy it.
He told me, "Over the years, less people have been paying with cash, because they're paying with credit, and in a credit business...people spend more...than they do with cash.” This made the principal-agent problem more likely.
The reasoning behind this he explained was:
- The customer (principal) could get the car they wanted because they had access to the credit, even though they couldn’t afford it.
- And the salesman (agent) could get what he wanted because the credit translated into commissions, even though it wasn’t in the best interest of the customer.
The principal-agent problem had both a push and a pull aspect to it.
Financial Trouble.
Sometimes this led people into financial trouble.
“People would sometimes beg me to take the car back,” he said. “They would say, why would you give me a loan if you knew that I couldn't afford it?”
One customer told him that they had to make a choice between baby food and paying the car loan.
“The guilt started to wear on me over the years,” he said. “Maybe that's why I'm telling you this now...but I was an ambitious salesman, and I had a family to feed also.”
Protecting yourself.
Here are some pointers that may protect you from the principal-agent problem.
Give the decision some time.
- Never impulse buy. Go home, do your homework and think about what you learned about the product or the person. The more time you give a decision, the more money you might save.
Learn to say “NO!”
- Warren Buffett said that the most successful people say no to almost everything. If an agent suggests something, it’s might be more to their favor, rather than yours.
Get a second opinion.
- Some people are more honest and competent than others. Talk to other people, you may learn something that the first person was hiding or didn’t know.
In Conclusion.
I thank Uncle Carl for helping me shed light on this subject and allowing me to use him in this post.
The principal-agent problem is everywhere.
- Salesman
- Legal counsel
- Investment professionals
- Politicians
- Even family and friends
The conflict between our self-interest and our duty to others when we act on their behalf is a conflict within us all. But maybe, if we are aware of this problem, we can take personal responsibility to mitigate it.
Stay frosty people. Thanks for reading.