The principal-agent problem, in political science and economics, (also known as the agency's agency dilemma or agency problem) occurs when one person or entity (the "agent") is capable of making decisions and/or take action on behalf of, or that effect, another person or entity: the "principal". This dilemma exists in situations where agents are motivated to act on their own behalf, as opposed to their principles, and are examples of moral dangers.
Common examples of this relationship include company management (agents) and shareholders (principals), politicians (agents) and voters (principals), or brokers (agents) and markets (buyers and sellers, principals). Consider a legal client (headmaster) wondering if their lawyer (the agent) recommends a protracted legal process because it is absolutely necessary for the client's welfare, or because it will result in an income for lawyers. In fact, problems can arise in almost all contexts in which one party is paid by the other to do something in which the agent has a small part or nothing in the results, whether in formal employment or negotiated deal such as paying for domestic work or car repair.
The problem arises where the two parties have different interests and asymmetric information (agents with more information), so the principal can not directly ensure that the agent always acts in their principal interests (principals), especially when the activities are useful to the point expensive for agents, and where the elements of what the agent does is expensive for the principal to observe (see moral dangers and conflicts of interest). Often, principals may be quite worried about the possibility of being exploited by agents they choose not to enter into transactions at all, when it will be mutually beneficial: suboptimal outcomes that can reduce overall wellbeing. The deviation from the principal interest by agents is called "agency costs".
In addition to agency issues between shareholders and managers, there are also other types of agency problems: coming from the presence of large shareholders and small shareholders, which is a common phenomenon in listed companies. In the dividend-sharing process, there is not only information asymmetry but different effects between large and small shareholders. The behavior of small shareholders is influenced by the decision of large shareholders; in return, they can also influence the decision of large shareholders but not significant. In such circumstances, large shareholders will violate the interests of dividend policy.
Various mechanisms can be used to align agent interests with principals. In employment, employers (principals) may use wage/commission rates, profit sharing, efficiency wages, performance measurement (including financial statements), bonding agents, or threats of termination to align workers' interests with their own interests.
Video Principal-agent problem
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The theory of principles and agents emerged in the 1970s from a mixture of economic disciplines and institutional theories. There are several opinions about who originated the theory, with the theories of Stephen Ross and Barry Mitnick claiming his authorship. Ross is said to initially describe a dilemma in that someone chooses a taste of ice cream for someone whose taste he does not know ( Ibid ). The most cited references to the theory, however, are from Michael C. Jensen and William Meckling. This theory has expanded beyond economic or institutional studies for all contexts of information asymmetry, uncertainty and risk.
In the legal context, the principal does not know enough about whether (or to what extent) the contract has been met, and they end up with agency costs. The solution to this information problem - which is closely related to the moral hazard issue - is to ensure the provision of appropriate incentives so that the agent acts according to the wishes of the perpetrators.
In terms of game theory, it involves changing the rules of the game so that the rational choice desired by the agent itself coincides with what the main actors want. Even in the arena of limited contract work, the difficulty of doing this in practice is reflected in many compensation mechanisms and monitoring schemes, as well as criticism of such mechanisms as, for example, Deming (1986) reveals in Seven Deadly Diseases. management.
Maps Principal-agent problem
Work contract
In the context of employment contracts, individual contracts form the main method of restructuring incentives, by connecting as closely as optimal information available about employee performance, and compensation for that performance. Due to the difference in the quantity and quality of available information about the performance of individual employees, the employee's ability to assume risk, and the ability of the employee to manipulate the evaluation method, the structural details of individual contracts vary widely, including mechanisms such as "cut size, [share], discretionary bonuses, promotion, profit sharing, wage efficiency, deferred compensation, etc. "Typically, these mechanisms are used in the context of different types of jobs: salesmen often receive some or all of their wages as commissions, production workers are usually paid hourly wages, paid monthly or semi-monthly (and if paid overtime, usually at a rate higher than the hourly rate implied by salary). The way in which this mechanism is used differs in two parts of the economy where Doeringer and Piore are called the "primary" and "secondary" sectors (see also the dual labor market).
The secondary sector is characterized by short-term employment, little or no internal promotion prospects, and wage determination mainly by market forces. In terms of work, it mainly consists of low or unskilled jobs, whether it is blue collar (manual work), white collar (eg, employee archives), or service jobs (eg, servants). These jobs are linked by the fact that they are characterized by "low skill levels, low incomes, easy access, work impermanence, and low outcomes for education or experience." In some service jobs, such as food service, golf caddying, and valet parking jobs, workers in some countries are paid most or all of them with tips.
The use of tips is a strategy on the part of the owner or manager to align the interests of the service worker with those of the owner or manager; service workers have an incentive to provide good customer service (thus benefiting a company's business), as this allows them to get a good tip.
Tipping problems are sometimes discussed in relation to the theory of principal-agent. "Examples of principals and agents include bosses and employees... [and] visitors and servants." "The" main-agent problem ", as it is known in economics, the harvest of each time agent is not inclined to do what their head wants... To influence them [the agent]], the principal should make it viable while the agents... [in the context of restaurants,] the better the dinner experience, the greater the tip of the waiter. "" In... the economist language, the tip serves as a way to reduce what is known as the classic "main-class" problem. " According to "Videbeck, a researcher at the New Zealand Institute for Competition Studies and Regulations [,]" [i] theory, tipping can lead to an efficient match between workers' attitudes toward service and the work they do. It is a means of getting people to work hard. Friendly waiters will go the extra mile, get their tip, and earn a relatively high income... [On the other hand,] if the wages are unpaid, the grumpy servants may actually choose to leave the industry and take on a job would be better suited to their personality. "
As a solution to the principal-agent problem, tipping is not perfect. In the hope of getting a bigger tip, the server, for example, may tend to give the customer an extra glass of extra wine or a second ice cream spoon. While these larger portions make customers happy and increase the chances of the server getting a good tip, they cut the profit margin of the restaurant. In addition, the server can memorize generous tippers while ignoring other customers, and in rare cases a bad sewing tippers.
Non-financial compensation
Part of this variation in incentive structures and monitoring mechanisms may be due to variations in the level of intrinsic psychological satisfaction that can be gained from different types of work. Sociologists and psychologists often argue that individuals take a certain degree of pride in their work, and that introducing performance-related salaries can destroy this "psycho-social compensation", since the exchange of relationships between employers and employees becomes much narrower, destroying much of the economy. or all potential social exchanges. The evidence for this can not be concluded - Deci (1971), and Lepper, Greene and Nisbett (1973) found support for this argument; Staw (1989) suggests another interpretation of the findings.
Team production
In related notes, Drago and Garvey (1997) use Australian survey data to show that when agents are placed on individual pay-for-performance schemes, they tend to help their co-workers. This negative effect is particularly important in jobs involving strong elements of "team production" (Alchian and Demsetz 1972), in which output reflects the contributions of many individuals, and individual contributions can not be easily identified, and compensation is therefore largely based on the output of the team. In other words, pay-for-performance increases incentives for free ride, because there is a great positive externality to the efforts of individual team members, and low returns to individuals (HolmstrÃÆ'¶m 1982, McLaughlin 1994).
The effect of implied negative incentives is confirmed by some empirical studies, (eg, Newhouse, 1973) for joint medical practice; costs increase and doctors work less because more income is shared. Leibowitz and Tollison (1980) found that greater legal partnerships usually resulted in worse cost containment. As a counter, peer pressure can potentially solve problems (Kandel and Lazear 1992), but this is dependent on relatively free peer monitoring to the individual performing monitoring/censorship in a particular instance (unless one carries social considerations of the norms and identity groups etc). Studies show that profit sharing, for example, typically increases productivity by 3-5% (Jones and Kato 1995, Knez and Simester 2001), although there are some selection problems (Prendergast).
Empirical evidence
There is, however, considerable empirical evidence of the positive effects of compensation on performance (although the study usually involves "simple" jobs in which aggregate performance measures are available, in which the wage rate should be most effective). In a study, Lazear (1996) saw a 44% increase in productivity (and 10% wages) in a change from salary to wage level, with half of productivity gains due to the effect of job selection. Research shows that pay performance improves performance when existing tasks are more repetitive, and reduces performance when the task at hand requires more creative thinking. Paarsch and Shearer (1996) also found evidence supporting the incentives and productivity effects of wage rates per unit, as did Banker, Lee, and Potter (1996), although the latter did not distinguish between incentives and electoral effects workers.
Design contract
Milgrom and Roberts (1992) identify four contract design principles: When perfect information is not available, HolmstrÃÆ'¶m (1979) develops the Principles of Information to solve this problem. It basically states that any performance measure that (at the margin) discloses information about the level of effort selected by the agent should be included in the compensation contract. These include, for example, Relative Performance Evaluations - measurements relative to others, similar agents, so as to screen out some common background noise factors, such as demand fluctuations. By eliminating some exogenous sources in agency revenue, the greater proportion of fluctuations in agent revenue is under its control, increasing its ability to assume risk. If used, with the use of larger wage per unit, this should increase incentives. (In the case of the simple linear model below, this means that an increase of x results in an increase of b .)
However, establishing the strongest incentives may not be optimal from the employer's point of view. The Principle Incentives state that the optimal intensity of incentives depends on four factors: the additional benefits created by additional effort, the precision with which the desired activity is assessed, the risk tolerance of the agent, and the agent responsive to the incentive. According to Prendergast (1999, 8), "the main limitation on [performance-related pay] is that the [its] provision imposes an additional risk on the worker..." A typical result of the initial principal-agent literature is that the wage rate tends to be up to 100% compensation package) as workers become more able to handle risks, as this ensures that workers fully internalize the consequences of their costly actions. In terms of incentives, in which we regard workers as rational individuals with an interest in themselves that provide costly effort (in the most general sense of the worker's input to the company's production function), the more compensation varies with effort, the better the incentive for workers to produce.
The third principle - The Principle of Monitoring Intensity - is complementary to the latter, in situations where the optimal incentive intensity is well suited to situations where the optimal level of monitoring is also high.. Thus, entrepreneurs effectively choose from a "menu" of intensity monitoring/incentives. This is because monitoring is an expensive way to reduce employee performance variance, which makes more difference for profit in situations that are also optimal for creating intense incentives.
The fourth principle is the Equal Compensation Principle , which basically states that activities that are equally rewarded by the employer should be as valuable (in terms of compensation, including non-financial aspects such as workplace fun) to employees. This relates to the problem that employees may engage in some activities, and if some of these are not monitored or monitored less heavily, this will be ignored, since activities with higher marginal returns to employees are preferred. This can be considered a kind of "disintermediation" - targeting certain measurable variables can cause others to suffer. For example, teachers who are rewarded by their students' exam scores tend to be more likely to teach 'for exams', and do not emphasize less relevant but perhaps equal or more important aspects of education; while AT & amp; T practicing at one time paying the programmer to the number of lines of code written produced a program longer than necessary - that is, the efficiency of the suffering program (Prendergast 1999, 21). Following HolmstrÃÆ'¶m and Milgrom (1990) and Baker (1992), this has been known as "multi-tasking" (where some relevant tasks are assigned, unappreciated tasks experience relative neglect). Because of this, the more difficult it is to fully determine and measure the variables to be conditioned, the less likely that performance-related salaries will be used: "basically, complex jobs will not normally be evaluated through explicit contracts." (Prendergast 1999, 9).
Where explicit actions are used, they are more likely to be some sort of aggregate measure, for example, baseball players and American Football are rarely rewarded on many of the special sizes available (eg, number of home runs), but often receive bonuses for aggregate performance measures like Most Valuable Player. The alternative to objective measures is subjective performance evaluation, usually by the supervisor. Here, however, there is an effect similar to "multi-tasking", because workers shift effort from subset of tasks that are considered useful and constructive, to a subset that they think provide the greatest beneficial and constructive appearance, and more commonly to try to lick the person with the supervisor. (One can interpret this as the destruction of the social capital of the organization - the worker who identifies with, and actively works for the benefit of, the enterprise - in favor of the creation of private social capital - the individual level social relations that enable the worker to progress ("the network").
Linear model
Keempat prinsip tersebut dapat diringkas dalam bentuk model kompensasi insentif yang paling sederhana (linear):
where w stands for wages, e for (unobserved) efforts, x for unobserved exogenous effects on results, and y for observed exogenous effects; while g and a represent the weight given to y , and the basic salary, respectively. The interpretation of b is the intensity incentive given to the employee.
The above discussion on explicit action assumes that the contract will create a linear incentive structure summarized in the above model. But while the combination of normal errors and the absence of income effects resulted in a linear contract, many of the contracts observed were not linear. To some extent this is due to the effect of income when workers create a tournament/hierarchy: "Quite simply, it may take more money to encourage the business of the rich than the less fortunate." (Prendergast 1999, 50). Similarly, fired threats create non-linear in the wages earned versus performance. In addition, many empirical studies illustrate inefficient behavior arising from nonlinear objective performance measures, or actions over a long period (eg, a year), which creates a nonlinearity in time due to discount behavior. This inefficient behavior arises because the incentive structure varies: for example, when a worker has exceeded a quota or has no hope of achieving it, compared to that approach - eg, Healy (1985), Oyer (1997), Leventis (1997). Leventis showed that New York surgeons, who were convicted of exceeding certain mortality, took fewer risky cases as they approached the threshold. Courty and Marshke (1997) provide evidence of incentive contracts offered to agencies, who receive bonuses to reach trainee quotas graduating within a year. This causes them to become 'rush-graduate' trainees to make quotas.
Options template
In certain cases agency problems can be analyzed by applying techniques developed for financial options, as implemented through a realistic option framework. Shareholders and bondholders have different objectives - for example, shareholders have an incentive to take risky projects rather than bondholders, and pay more in dividends than desired by bondholders. At the same time, because equity can be seen as a call option on corporate value, increased variance in firm value, other things that remain the same, will lead to an increase in equity value, and possible shareholders. Therefore, risky with current net negative values, which while making them better, can make bondholders worse off. See the Option pricing approach under Business ratings for further discussions. Nagel and Purnanandam (2017) see that since bank assets represent risky debt claims, bank equity resembles subordinated debt and therefore the yield of shares is cut by the difference between the face values ​​of corporate debt and bank deposits. Based on these observations, Peleg-Lazar and Raviv (2017) show that in contrast to the classical agent theory of Michael C. Jensen and William Meckling, variant increases will not lead to an increase in the value of equity if the debtor is a solvent.
Performance evaluation
Evaluate objective performance
The main problem in measuring employee performance in cases where it is difficult to draw a direct connection between performance and profitability is the setting of standards for assessing performance. One method of setting an absolute objective performance standard - seldom used because it is expensive and only suitable for simple repetitive tasks - is the study of time and movement, which examines in detail how quickly it is possible to perform certain tasks. It has been used constructively in the past, especially in manufacturing. More generally, however, even in the field of objective performance evaluation, some form of relative performance evaluation should be used. Usually this takes the form of comparing a worker's performance with his peers in a company or industry, perhaps taking into account the various exogenous circumstances that affect it.
The reason that employees are often paid on a working basis rather than by direct measurement of results is often more efficient using an indirect system to control the quantity and quality of business, due to various information and other problems (eg, turnover costs, which determine the optimal minimum length of relationship between the firm and employees). This means that methods such as deferred compensation and tournament-like structures are often better suited to creating incentives for employees to contribute what they can to produce over a longer period (years rather than hours). It represents a "pay-for-performance" system in a more lenient and broader sense, since workers who consistently work harder and better are more likely to be promoted (and usually pay more), than the narrow definition of "pay for performance ", such as unit price. This discussion has been practiced almost entirely for selfish, self-rational individuals. In practice, however, the incentive mechanisms employed by successful companies take account of their embedded socio-cultural context (Fukuyama 1995, Granovetter 1985), so as not to destroy the social capital that they may be more constructive in mobilizing towards organic development, social organization, from things like "the loyalty and pride of the workers (...) that can be important to the company's success..." (Sappington 1991,63)
Evaluation of subjective performance
Subjectivity is concerned with judgments based on subjective impressions and opinions of supervisors, which can be expressed through the use of subjective performance measures, the flexibility of ex post in the weighting of objective performance measures, or ex post discretional adjustments, which all based on factors other than the specified performance size ex ante . The subjective performance evaluation allows the use of smoother and more balanced employee performance assessments, and is typically used for more complex work where comprehensive objective measures are difficult to determine and/or measure. While often the only feasible method, the problem of officers with subjective performance evaluations has resulted in various incentive structures and supervisory schemes. One problem, for example, is that supervisors may be less reporting on performance to save on wages, if they are in some cases the claimant is left, or may be priced on a cost-savings basis. This tendency is of course to some extent offset by the danger of retaliation and/or employee demotivation, if the supervisor is responsible for the employee's output.
Another problem is related to what is known as "rank compression". Two related influences - centrality bias, and lightening bias - have been documented (Landy and Farr 1980, Murphy and Cleveland 1991). The first results of supervisors are reluctant to critically distinguish between workers (perhaps out of fear of destroying team spirit), while the latter comes from supervisors who refuse to offer poor judgments to subordinates, especially when these ratings are used to determine payments, not least because evaluation the bad can decrease motivation rather than motivate. However, this bias creates noise into the relationship between wages and effort, reducing the incentive effect of performance-related payments. Milkovich and Wigdor (1991) state that this is the reason for the separation of evaluation and collective payments, with evaluations primarily used to allocate training.
Finally, while ranking compression problems stem from regulators, related effects occur when workers actively seek to influence the regulatory oversight, either by influencing the performance information provided to supervisors: multitasking (focusing on more productive activities - Paul 1992), or with work "too hard" to signal the quality of the worker or create a good impression (HolmstrÃÆ'¶m 1982); or by influencing evaluation, for example, by "currying effect" (Milgrom and Roberts 1988) or by direct bribe (Tirole 1992).
Incentive Structure
Tournament
Much of the discussion here is in terms of individual pay-for-performance contracts; but many large companies use the internal labor market (Doeringer and Piore 1971, Rosen 1982) as a solution to some of the issues outlined. Here, there is a "pay-for-performance" in a looser sense for a longer period of time. There is little variation in pay in value, and salary increases come with job changes or titles (Gibbs and Hendricks 1996). The incentive effects of this structure are addressed in what is known as the "tournament theory" (Lazear and Rosen 1981, Green and Stokey (1983), see Rosen (1986) for multi-stage tournaments in the hierarchy in which it explains why CEOs are repaid many times more than any other worker in the company). See the superstar article for more information on the tournament theory.
Workers are motivated to supply businesses with the wage increases they will earn if they win a promotion. Some extended tournament models predict that relatively weaker agents, whether they compete in sport tournaments (Becker and Huselid 1992, at NASCAR racing) or in the broiler industry (Knoeber and Thurman 1994), will take riskier action instead of improving their supply efforts as a cheap way to improve the prospect of winning. These actions are inefficient as they increase risk taking without increasing the average effort afforded.
The main problem with tournaments is that individuals are rewarded based on how good they are relative to others. Colleagues may be reluctant to help others and may even sabotage other people's efforts rather than improving their own efforts (Lazear 1989, Rob and Zemsky 1997). This is supported empirically by Drago and Garvey (1997). Then why is the tournament so popular? First, because - especially the problem of compression rating - it is difficult to determine the absolute difference in worker performance. The tournament only requires ranking sequence evaluation. Second, it reduces the risk of rent seeking, because bonuses paid to favorite workers are associated with increased responsibility in new jobs, and supervisors will suffer if they do not promote the most qualified people. Thirdly, where the reward structure (relative) remains, reduces the likelihood of companies denying paying wages. As Carmichael (1983) puts it, the prize structure represents the level of commitment, both for absolute and relative wages. Finally, when the measurement of worker productivity is difficult, for example, say monitoring is expensive, or when the tasks that the worker must do for the job varies in nature, making it difficult to measure effort and/or performance, then running a tournament at a company will encourage workers to provide temporary worker efforts will be negligent if there is no promotion.
Tournaments also promote risk-seeking behavior. In essence, the compensation scheme becomes more like a call option on performance (which increases the value with increased volatility (see price option).If you are one of ten players competing for asymmetric main prizes, you can benefit from reducing the expected value of your overall performance to the company to increase your chances of having great performance (and win prizes).This moderate amount can offset the greater risk aversion from the agent vs. the principal because their social capital is concentrated in their company while in the case of a public company principals typically have their shares as part of a diversified portfolio, successful innovation depends primarily on employees' willingness to take risks. In cases of extreme incentive intensity, this kind of behavior can create catastrophic organizational failure.If the principal me have a company as part of a diversified portfolio, this may be a price that is worth paying for greater cash Success through innovations elsewhere in the portfolio. However, if the risks taken are systematic and can not be diversified, for example, exposure to the price of public housing, then the failure will damage the interests of the principal and even the economy as a whole. (cf. Kidder Peabody, Barings, Enron, AIG to name a few). The failure of the ongoing periodic disaster organization is directly incentivized by tournaments and other superstar/winning-take-all compensation systems (Holt 1995).
Suspended compensation
Tournaments are one way to apply the general principle of "deferred compensation", which is basically an agreement between workers and companies to commit to each other. Under the deferred compensation scheme, workers are paid too high when old, with low pay when young. Salop and Salop (1976) argue that this stems from the need to attract workers more likely to stay in the company for longer periods, due to the expensive turnover. Alternatively, the delay in evaluating worker performance may cause compensation to be weighed for the next period, when better and poorer workers should be greater distinguished. (Workers may even prefer to have increased wages over time, perhaps as a method of forced savings, or as indicators of personal development, for example, Loewenstein and Sicherman 1991, Frank and Hutchens 1993.) eg Akerlof and Katz 1989: if older workers receive efficiency wages, younger workers may be prepared to work less in order to receive them later. Overall, evidence suggests the use of deferred compensation (eg, Freeman and Medoff 1984, and Spilerman 1986 - seniority provisions often included in payment, promotion and retention decisions, regardless of productivity.)
Other apps
The "principal-agent problem" has also been discussed in the context of energy consumption by Jaffe and Stavins in 1994. They try to categorize the market and non-market barriers to the adoption of energy efficiency. In terms of efficiency, market failures arise when technologies that are cost-effective and save energy are not implemented. Jaffe and Stavins describe the common case of tenant-owner problems with energy issues as a major-agent problem. "The prospective adopter is not a party who pays for energy bills, so good information in the hands of potential users may not be sufficient for optimal diffusion: adoption will only occur if adopters can recover investment from those who enjoy energy savings, so if it is difficult owner of the information to deliver it credibly to those who benefit from reduced energy use, major problems/agents arise. "
The use of energy efficiency from the main agent terminology is actually different from the ordinary in some way. In a landlord/tenant or more common buyer-machine/energy-bill-payer situation, it is often difficult to describe who will be the principal and who the agent is. Is the landlord agent and principal tenant, since the landlord "hired" by the tenant through rent payments? As (Murtishaw and Sathaye, 2006) point out, "In the housing sector, the principal definitions of principals and agents should be stretched beyond strict literal definitions."
Another difference is that the main agent problem in energy efficiency does not require information asymmetry: both landlords and tenants may be aware of the overall cost and benefits of energy-saving investments, but as long as owners pay for equipment and tenants paying energy bills, investing in new equipment, will not be done. In this case, there is also little incentive for the tenant to make a capital efficiency investment with a payback period usually for several years, and which will eventually be returned to the owner as a property. Because energy consumption is determined both by technology and by behavior, the opposing main agent problem arises when the energy bill is paid by the landlord, leaving the tenant without incentive to moderate his energy use. This often happens to rented office space, for example.
The problem of energy efficiency main agents applies in many cases to rent buildings and apartments, but arises in other circumstances, most often involving a relatively high cost of front for energy-saving technologies. Although it is difficult to assess appropriately, major agent issues are seen as a major barrier to efficient technological diffusion. This can be partially addressed by promoting a performance-based contractual savings account, in which both parties benefit from efficiency savings. The problem of market barriers to energy efficiency, and major agency problems in particular, received new attention due to the importance of global climate change and the limited increase in fossil fuel supply prices. The principal-agent issue in energy efficiency is the topic of the International Energy Agency report: "Think of the Gap - Measuring the Problems of Head-Agents in Energy Efficiency" (2007).
The problem manifests itself in ways middle managers discriminate against employees who they consider to be "over-qualified" in recruitment, assignment and promotion, and suppress or end "whistleblowers" who want to make senior management aware of fraudulent or illegal activities. This can be done for the benefit of middle managers and to the best interests of shareholders (or members of nonprofit organizations). Public officials are agents, and people adopt constitutions and laws to try to manage relationships, but officials can betray their beliefs and allow themselves to be overly influenced by lobby groups or they may abuse their managerial wisdom and policy by showing favoritism personal or bad faith. by employing a friend who is not qualified or by engaging in corruption or patronage, such as choosing a company of friends or family members for a contract without a tender. Problems arise in client-lawyer, probate judge, bankruptcy guardian, and other such relationships. In rare cases, lawyers who are entrusted with real accounts with large balances act against the interests of the person hiring them to act as their agent by embezzling funds or "playing the market" with the client's money (with the intention of pocketing any outcome).
Economic theory
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