Investment Language 101 Series: TERM OF THE DAY: -- What Is: ' The Agency Problem ' | E.33 | Trading Candle Cheat Sheet Incl. Each Episode.

in #money7 years ago (edited)


A series designed to help all the new people flooding into & entering Crypto/Investments daily who get thrown into the rabbit hole so to speak and everything is new to them.

It is a TLDR / Short Form Series, covering ONLY one thing each episode in blue collar, easy to understand language to give a SHORT OVERVIEW of the term or lesson of the day.

It is specifically designed this way to keep it short and simple.

People can then search out extra info if they wish.

I've never seen a regular series or resource running on Steemit to continually address this basic need so I decided to do it.


TERM OF THE DAY:


What is....

' The Agency Problem ' ?

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The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests.

In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize his own wealth.

While it is not possible to eliminate the agency problem completely, the manager can be motivated to act in the shareholders' best interests through incentives such as performance-based compensation, direct influence by shareholders, the threat of firing and the threat of takeovers.

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Breaking Down...

' The Agency Problem ' :

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Principal-Agent Relationship:

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The agency problem does not exist without a relationship between a principal and an agent. In this situation, the agent performs a task on behalf of the principal. This may arise due to different skill levels, different employment positions or restrictions on access.

For example, a principal will hire a plumber — the agent — to fix plumbing issues. Although the plumber‘s best interest is to make as much income as he can, he is given the responsibility to perform in whatever situation results in the most benefit to the principal.

Incentives:

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The agency problem arises due to an issue with incentives. An agent may be motivated to act in a manner that is not favorable for the principal if the agent is presented with an incentive to act in this way. For example, in the plumbing example earlier, the plumber may make three times as much money by recommending a service the agent does not need. An incentive (three times the pay) is present, and this causes the agency problem to arise.

Reducing and Eliminating the Agency Problem:

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The agency problem may be minimized by altering the structure of compensation. If the agent is paid not on an hourly basis but by completion of a project, there is less incentive to not act on the principal’s behalf. In addition, performance feedback and independent evaluations hold the agent accountable for their decisions.

Historical Example of Agency Problem:

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In 2001, energy giant Enron filed for bankruptcy. Accounting reports had been fabricated to make the company appear to have more money than what was actually earned. These falsifications allowed the company’s stock price to increase during a time when executives were selling portions of their stock holdings. Although management had the responsibility to care for the shareholder’s best interests, the agency problem resulted in management acting in their own best interest.


Trading Candle Cheat Sheet:

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Further Reading/Source/Resources


Friend of the People -- Enemy of the State.

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I am leaving these images I made here until I figure out one that fits properly and looks right for the first/main image for the post/series.

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Since Steemit dev's changed the size of the picture frame that shows, it has honestly been a real problem getting images to match the screen, it was perfectly fine months ago before they messed around with it.

SMH.


Thanks for reading, have a nice day.


PixaBay has tons of free pictures for us all to use!!!
Super Easy/Fast Picture Edits / Resizing at: http://www.picresize.com/ and also https://www298.lunapic.com/editor/







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Please note -- I will have limited internet access for awhile -- so PLEASE do not be upset that I cannot reply right away, or to everyone. I am dealing with some changes, and will have limited time online and will be happy if I get a few blog posts up a week.
This has really upset some people but I do not force my opinions on others, or need to communicate every detail of my life or issues, most people do not care anyways. I invested around 10 hours or more a day on Steemit most of my first 13 mths here, trying to build community, put out content and engage people, help and donate to people, and I just do not have that time in my life right now, and that includes for replies and voting/curation.
I have done my best, sorry if you do not understand like some are clearly having a problem with. It's a blogging platform, and I will do my best at everything, and to keep blogging.
Carry On.

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Indeed, the investment language is well spoken. Especially concerning the principal-agent relationship. Thanks

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