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A Behavioral Theory of the Firm

The behavioral theory of the firm first appeared in the 1963 book A Behavioral Theory of the Firm by Richard M. Cyert and James G. March.[1] The work on the behavioral theory started in 1952 when March, a political scientist, joined Carnegie Mellon University, where Cyert was an economist.[2]

A Behavioral Theory of the Firm
Cover of the second edition
AuthorRichard Cyert and James March
Publication date
1963
ISBN0-631-17451-6

Before this model was formed, the existing theory of the firm had two main assumptions: profit maximization and perfect knowledge. Cyert and March questioned these two critical assumptions.[3]

Background edit

A behavioral model of rational choice by Herbert A. Simon paved the way for the behavioral model.[4][5]Neo-classical economists assumed that firms enjoyed perfect information. In addition the firm maximized profits and did not suffer from internal resource allocation problems.[6]

Advocates of the behavioral approach also challenged the omission of the element of uncertainty from the conventional theory. The behavioral model, like the managerial models of Oliver E. Williamson and Robin Marris, considers a large corporate business firm in which the ownership is separate from the management.[7]

Cyert and March edit

These researchers offered four major research themes:[8]

  • A small number of key economic decisions
  • Development of a general theory, generalizing the results from studies of specific firms
  • Linkage of empirical data to models
  • Orientation towards process rather than outcomes

Model framework edit

Theory construction edit

The behavioral approach takes the firm as the basic unit of analysis. It attempts to predict behaviour with respect to price, output and resource allocation decisions. It emphasizes the decision-making process.[8]

The firm as a coalition of groups edit

The theory argues that while small firms may operate under the guidance of the entrepreneur, such a simple model does not describe larger corporations. These larger firms are coalitions of individuals or groups, which may include managers, stockholders, workers, suppliers and so on.[8]

According to Cyert and March, these groups participate in setting goals and making decisions. Priorities and information may vary by group, potentially creating conflicts. Cyert and March mentioned five goals which real world firms generally possess: production; inventory; market share; sales and profits.

According to the behavioral theory, all the goals must be satisfied, following an implicit order of priority among them.[7]

Satisficing behaviour edit

Cyert and March proposed that real firms aim at satisficing rather than maximizing their results. I.e., some groups may settle for "good enough" achievements rather than striving for the best possible outcome. This came from a concept known as bounded rationality, which was developed by Herbert Simon.[4] Bounded rationality means prudent behaviour under a given set of circumstances.[9]

In this model goals are not set to maximize relevant magnitudes such as profits, sales and market share. Instead, goals are compromises negotiated by the groups.[10]

The process of decision making edit

In the model, top management sets the goals of the organization. But these goals are implemented through decision making at two levels, one at the top and the second at lower management levels. During approval of proposals of various departments, two criteria are generally employed. A financial measure assesses the availability of the required funds given resources. An improvement measure assesses whether the proposal improves the health of the organization. According to Cyert and March, information is required to take the most appropriate decisions. However, information gathering itself is not Costless and requires resources.[10]

Organizational slack edit

To keep the various groups in the organization, payments had to be in excess of what was required for the efficient working of the firm. The difference between the total resources and the necessary payments is called the organizational slack. In conventional economic theory organizational slack is zero, at least at equilibrium. Cyert and March claim that organizational slack plays a stabilizing and adaptive role.[11][12]

Cyert and March gave many examples of organizational slack such as high dividends paid to shareholders, prices set lower than necessary and wages paid in excess of those required.

Critical evaluation edit

The behavioral model made a great impact on the theory of the firm. It gave insights in the process of goal formation and fixation of aspiration levels and resource allocation. Its critics[who?] claim that the theory is unnecessarily complicated. The virtual assembly of the firm, with the decision-making process as the unit, for the purpose of predicting their behaviour is highly questioned by critics. There has also been staunch support for profit maximization rather than satisficing behaviour, which is one of the core elements of the model.[13]

Later research edit

The behavioral theory of the firm has become important for much later research in organization theory and management, and has led to empirical studies and simulation modeling [14][15] in organizational learning, as well as work on the cognitive foundations of firm strategy.[16][17]

See also edit

Notes edit

  1. ^ Ahuja 2007
  2. ^ "This Week's Citation Classic" (PDF).
  3. ^ Zhang. "Cyert March Review".
  4. ^ a b Simon, Herbert (February 1955). (PDF). The Quarterly Journal of Economics. 69 (1): 99–118. doi:10.2307/1884852. JSTOR 1884852. Archived from the original (PDF) on 2012-08-12. Retrieved 2012-01-26.
  5. ^ Ahuja 2007, p. 938
  6. ^ "Richard Nelson's Dynamic Capabilities".
  7. ^ a b Ahuja 2007, p. 939
  8. ^ a b c Mahoney, Joseph. "Behavioral Theory of the Firm" (PDF).
  9. ^ Gillespie, Andrew (1989). BUSINESS ECONOMICS. p. 166. ISBN 978-81-87344-86-5.
  10. ^ a b Ahuja 2007, p. 942
  11. ^ Cyert & March 1992, p. 353
  12. ^ Hirschman, Albert O. (1970). Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. Harvard University Press. pp. 11–15. ISBN 978-0-674-27660-4.
  13. ^ Ahuja 2007, p. 944
  14. ^ Augier & Prietula 2007
  15. ^ Bray & Prietula 2007
  16. ^ Levitt & March 1988, pp. 319–340
  17. ^ Gavetti et al. 2012, pp. 1–40

References edit

  • Cyert, Richard; March, James G. (1992). A Behavioral Theory of the Firm (2 ed.). Wiley-Blackwell. ISBN 0-631-17451-6.
  • Ahuja, H.L. (2007). Advanced Economic Theory: Microeconomic Analysis. Gardners Books. ISBN 978-81-219-0260-1.
  • Levitt, Barbara; March, James G. (1988). "Organizational Learning". Annual Review of Sociology. 14: 319–340. doi:10.1146/annurev.so.14.080188.001535. ISSN 0360-0572. JSTOR 2083321.
  • Gavetti, Giovanni; Greve, Henrich R.; Levinthal, Daniel A.; Ocasio, William (June 2012). "The Behavioral Theory of the Firm: Assessment and Prospects". Academy of Management Annals. 6 (1): 1–40. doi:10.5465/19416520.2012.656841.
  • Augier, Mie; Prietula, Michael (Jun 2007). "Historical Roots of the 'A Behavioral Theory of the Firm' Model at GSIA". Academy of Management Annals. 18 (3): 507–522. doi:10.1287/orsc.1070.0276. JSTOR 25146116.
  • Bray, David; Prietula, Michael (Jan 2007). "Social Networks, Exploration, and Exploitation in Multi-Tier Hierarchical Organizations Experiencing Environmental Turbulence". North American Association for Computational Social and Organizational Science (NAACSOS) Conference. doi:10.2139/ssrn.962276. S2CID 107777086. SSRN 962276.

behavioral, theory, firm, behavioral, theory, firm, first, appeared, 1963, book, richard, cyert, james, march, work, behavioral, theory, started, 1952, when, march, political, scientist, joined, carnegie, mellon, university, where, cyert, economist, cover, sec. The behavioral theory of the firm first appeared in the 1963 book A Behavioral Theory of the Firm by Richard M Cyert and James G March 1 The work on the behavioral theory started in 1952 when March a political scientist joined Carnegie Mellon University where Cyert was an economist 2 A Behavioral Theory of the FirmCover of the second editionAuthorRichard Cyert and James MarchPublication date1963ISBN0 631 17451 6Before this model was formed the existing theory of the firm had two main assumptions profit maximization and perfect knowledge Cyert and March questioned these two critical assumptions 3 Contents 1 Background 1 1 Cyert and March 2 Model framework 2 1 Theory construction 2 2 The firm as a coalition of groups 2 3 Satisficing behaviour 2 4 The process of decision making 2 5 Organizational slack 3 Critical evaluation 4 Later research 5 See also 6 Notes 7 ReferencesBackground editA behavioral model of rational choice by Herbert A Simon paved the way for the behavioral model 4 5 Neo classical economists assumed that firms enjoyed perfect information In addition the firm maximized profits and did not suffer from internal resource allocation problems 6 Advocates of the behavioral approach also challenged the omission of the element of uncertainty from the conventional theory The behavioral model like the managerial models of Oliver E Williamson and Robin Marris considers a large corporate business firm in which the ownership is separate from the management 7 Cyert and March edit These researchers offered four major research themes 8 A small number of key economic decisions Development of a general theory generalizing the results from studies of specific firms Linkage of empirical data to models Orientation towards process rather than outcomesModel framework editTheory construction edit The behavioral approach takes the firm as the basic unit of analysis It attempts to predict behaviour with respect to price output and resource allocation decisions It emphasizes the decision making process 8 The firm as a coalition of groups edit The theory argues that while small firms may operate under the guidance of the entrepreneur such a simple model does not describe larger corporations These larger firms are coalitions of individuals or groups which may include managers stockholders workers suppliers and so on 8 According to Cyert and March these groups participate in setting goals and making decisions Priorities and information may vary by group potentially creating conflicts Cyert and March mentioned five goals which real world firms generally possess production inventory market share sales and profits According to the behavioral theory all the goals must be satisfied following an implicit order of priority among them 7 Satisficing behaviour edit Cyert and March proposed that real firms aim at satisficing rather than maximizing their results I e some groups may settle for good enough achievements rather than striving for the best possible outcome This came from a concept known as bounded rationality which was developed by Herbert Simon 4 Bounded rationality means prudent behaviour under a given set of circumstances 9 In this model goals are not set to maximize relevant magnitudes such as profits sales and market share Instead goals are compromises negotiated by the groups 10 The process of decision making edit In the model top management sets the goals of the organization But these goals are implemented through decision making at two levels one at the top and the second at lower management levels During approval of proposals of various departments two criteria are generally employed A financial measure assesses the availability of the required funds given resources An improvement measure assesses whether the proposal improves the health of the organization According to Cyert and March information is required to take the most appropriate decisions However information gathering itself is not Costless and requires resources 10 Organizational slack edit To keep the various groups in the organization payments had to be in excess of what was required for the efficient working of the firm The difference between the total resources and the necessary payments is called the organizational slack In conventional economic theory organizational slack is zero at least at equilibrium Cyert and March claim that organizational slack plays a stabilizing and adaptive role 11 12 Cyert and March gave many examples of organizational slack such as high dividends paid to shareholders prices set lower than necessary and wages paid in excess of those required Critical evaluation editThe behavioral model made a great impact on the theory of the firm It gave insights in the process of goal formation and fixation of aspiration levels and resource allocation Its critics who claim that the theory is unnecessarily complicated The virtual assembly of the firm with the decision making process as the unit for the purpose of predicting their behaviour is highly questioned by critics There has also been staunch support for profit maximization rather than satisficing behaviour which is one of the core elements of the model 13 Later research editThe behavioral theory of the firm has become important for much later research in organization theory and management and has led to empirical studies and simulation modeling 14 15 in organizational learning as well as work on the cognitive foundations of firm strategy 16 17 See also editTheory of the firm Carnegie SchoolNotes edit Ahuja 2007 This Week s Citation Classic PDF Zhang Cyert March Review a b Simon Herbert February 1955 A behavioral model of rational choice PDF The Quarterly Journal of Economics 69 1 99 118 doi 10 2307 1884852 JSTOR 1884852 Archived from the original PDF on 2012 08 12 Retrieved 2012 01 26 Ahuja 2007 p 938 Richard Nelson s Dynamic Capabilities a b Ahuja 2007 p 939 a b c Mahoney Joseph Behavioral Theory of the Firm PDF Gillespie Andrew 1989 BUSINESS ECONOMICS p 166 ISBN 978 81 87344 86 5 a b Ahuja 2007 p 942 Cyert amp March 1992 p 353 Hirschman Albert O 1970 Exit Voice and Loyalty Responses to Decline in Firms Organizations and States Harvard University Press pp 11 15 ISBN 978 0 674 27660 4 Ahuja 2007 p 944 Augier amp Prietula 2007 Bray amp Prietula 2007 Levitt amp March 1988 pp 319 340 Gavetti et al 2012 pp 1 40References editCyert Richard March James G 1992 A Behavioral Theory of the Firm 2 ed Wiley Blackwell ISBN 0 631 17451 6 Ahuja H L 2007 Advanced Economic Theory Microeconomic Analysis Gardners Books ISBN 978 81 219 0260 1 Levitt Barbara March James G 1988 Organizational Learning Annual Review of Sociology 14 319 340 doi 10 1146 annurev so 14 080188 001535 ISSN 0360 0572 JSTOR 2083321 Gavetti Giovanni Greve Henrich R Levinthal Daniel A Ocasio William June 2012 The Behavioral Theory of the Firm Assessment and Prospects Academy of Management Annals 6 1 1 40 doi 10 5465 19416520 2012 656841 Augier Mie Prietula Michael Jun 2007 Historical Roots of the A Behavioral Theory of the Firm Model at GSIA Academy of Management Annals 18 3 507 522 doi 10 1287 orsc 1070 0276 JSTOR 25146116 Bray David Prietula Michael Jan 2007 Social Networks Exploration and Exploitation in Multi Tier Hierarchical Organizations Experiencing Environmental Turbulence North American Association for Computational Social and Organizational Science NAACSOS Conference doi 10 2139 ssrn 962276 S2CID 107777086 SSRN 962276 This article needs additional or more specific categories Please help out by adding categories to it so that it can be listed with similar articles August 2021 Retrieved from https en wikipedia org w index php title A Behavioral Theory of the Firm amp oldid 1171070809, wikipedia, wiki, book, books, library,

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