- Email: [email protected]
A retrospective look at A Behavioral Theory of the Firm
Journal of Economic Behavior & Organization Vol. 66 (2008) 1–6
A retrospective look at A Behavioral Theory of the Firm Mie Augier ∗ , James G. March Stanford University, United States Available online 9 February 2008
Abstract The papers in this special issue focus on ideas associated with a book published 45 years ago, A Behavioral Theory of the Firm (Cyert, R.M., March, J.G., 1963. A Behavioral Theory of the Firm. Endlewood Cliffs. Prentice Hall, NJ). The book proposed the introduction of a few more realistic behavioral assumptions into the economic theory of the firm. The papers presented here examine some aspects of the history of the ideas found in the book, extend and elaborate the ideas in the context of current research, and indicate possible directions for future research in the behavioral tradition. We will not attempt to summarize the papers, but will try to locate them gently in their historical and intellectual context. © 2008 Elsevier B.V. All rights reserved. JEL classification: b2; L1 Keywords: Social and behavioral sciences; Post-war; Economics; Theory of the firm
1. A little history The immediate post-Second World War period was an era that venerated science (Leslie, 1993; Zachary, 1999). The social and behavioral sciences became more quantitative, more analytical, and more committed to scientific principles. Economic theory, for example, became substantially more mathematical. At the same time, leading economists (not all of them to be sure) became interested in the possibilities of making economic theory more attentive to the other social sciences and to the realities of economic behavior by real humans in real institutions (e.g. Koopmans, 1957; Baumol, 1959, 1962; Marris, 1964; Marschak and Radner, 1972). A Behavioral Theory of the Firm was embedded in, and reflects, those post-war intellectual enthusiasms of economics and behavioral social science. ∗
Corresponding author. Tel.: +1 650 723 9898. E-mail address: [email protected] (M. Augier).
0167-2681/$ – see front matter © 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2008.01.005
2
M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6
The book was also a product of a specific academic institution that was notorious for its vigor, the Graduate School of Industrial Administration (GSIA) at the Carnegie Institute of Technology (predecessor to Carnegie Mellon University) (Williamson, 1996; March, 2007). GSIA became a poster child for an invigoration of fundamental interdisciplinary research within business schools seeking deeper understandings in fields such as accounting, finance, marketing, operations research, microeconomics, and organizations. Some recitations of the importance of the GSIA setting can be found in the writings of those who were there (see, e.g. Williamson, 1996, 2002; Modigliani, 2001; Holt, 2004; Cooper, 2004; March, 2007; Simon, 1991). A Behavioral Theory of the Firm was a product of that milieu. Work on the book at GSIA overlapped in time and personnel with another well-known book of the period, Organizations (March and Simon, 1958), and the so-called “Carnegie School” in organization theory is largely defined by these two books. Although the books were written by only three people, the active research culture within which they were embedded included faculty colleagues such as William W. Cooper, Harold Guetzkow, Charles Holt, Franco Modigliani, Allan Newell, and Harrison White, and graduate students such as William Dill, Edward Feigenbaum, Julian Feldman, John Muth, William Starbuck, and Oliver Williamson. This group shared a dedication to reconstructing the economic theory of the firm, though they differed to some extent in the precise directions of their preferred changes and in the fervor of their messianic inclinations. 2. The “Carnegie School” and the behavioral tradition The triumvirate of Cyert, March, and Simon was the core group for the Carnegie pursuit of an understanding of the firm and other organizations. The behavioral view that was developed at GSIA appeared primarily, but not exclusively, in economic journals initially, but it drew tools, concepts and insights not only from economics, but also from anthropology, political science, psychology, and sociology. Those concepts and general ideas included the notions that decisions are intendedly rational but bounded by human and institutional limitations, that organizations accumulate and use slack, that attention is a scarce resource, that firms satisfice with respect to aspiration levels, that firms adjust expectations and aspirations over time in response to experience, and that firms can be seen as coalitions of individuals and groups with conflicting goals (March and Simon, 1958; Cyert and March, 1963). The basic satisficing kernel was presented in two early pieces written by Simon (Simon, 1955, 1956). The development of ideas of slack, organizational learning, conflict, and search came in the two books and the articles on which they were based (Cyert and March, 1955, 1956, 1959a,b; Cyert et al., 1961, 1958a,b; Feigenbaum and March, 1960; March, 1962). In retrospect, one can think of the two books as having different objectives, more than different ideas. Organizations was an attempt to create an inventory, to organize everything that might be alleged to be known about organization theory, whereas A Behavioral Theory of the Firm was more oriented towards finding something relevant to say about a new theory of the firm. There were, however, differences in the substantive emphases of the two books. Conflict of interest and organizational learning were discussed in Organizations, but they were more central to A Behavioral Theory of the Firm. The idea of organizational slack was more important in Cyert and March than it was in March and Simon, as were the ideas of uncertainly avoidance and the sequential attention to goals. On the other hand, classical issues such as satisfaction, planning, motivation, and organizational design were more important in March and Simon than in Cyert and March.
M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6
3
At the center of A Behavioral Theory of the Firm was the idea that a firm is an adaptive political coalition, a coalition between different individuals and groups of individuals in the firm, each having different goals and hence possibly in conflict. “Since the existence of unresolved conflict is a conspicuous feature of organizations”, the authors stated, “it is exceedingly difficult to construct a useful positive theory of organizational decision making if we insist on internal goal consistency. As a result, recent theories of organizational objectives describe goals as the result of a continuous bargaining-learning process. Such a process will not necessarily produce consistent goals” (28). Although they shared a general emphasis on decision making with March and Simon, Cyert and March saw firms as operating less through calculated decisions than through routines (standard operating procedures). Experience is embodied in standard operating procedures, rules reflecting solutions to problems that the firm has managed to solve in the past and negotiated resolutions of past conflicts. As time passes and experience changes, the firm’s routines change through processes of organizational search, learning, and negotiation. As a result, the firm is seen as a system of rules that change over time in response to experience, as that experience is interpreted in terms of the relation between performance and aspirations and in terms of multiple, conflicting goals. To elaborate those basic ideas, A Behavioral Theory of the Firm proposed a set of ideas about organizational goals, expectations, and choice. Goals were seen as being defined by the coalition members and represented by aspiration levels that distinguished between outcomes that were good enough and those that were not. Expectations were seen as being based on feedback and search, possibly biased, and possibly disputed within the firm. Choice was seen as problem-oriented and organized by standard operating procedures and by patterns of attention. Each of these processes was pictured as shaped by the use of human actors as instruments. These ideas were developed in terms of four major concepts. The first was the quasi-resolution of conflict. Coping with conflict, without necessarily resolving it, involves factoring problems into subproblems and delegating authority to solve the subproblems (not necessarily consistently), using acceptable level criteria that avoid the necessity of trade-offs to identify the one best solution, and attending to goals sequentially rather than simultaneously. The second concept was uncertainty avoidance. Firms avoid the necessity of confronting uncertainty by delaying decisions until the uncertainty is resolved through the unfolding of events, and by negotiating their internal and external environments through budgets and contracts. The third concept was problemistic search. Search is assumed to be motivated by problems, simple-minded in its causal models, and biased by goals and experiences. The fourth concept was organizational learning. Firms adapt their aspiration levels to their own experience and the experience of others. They adapt their attention and search rules to experience. Because they see different things and evaluate things differently, different parts of the organization learn different things from the same historical events. 3. Economics and the behavioral tradition A Behavioral Theory of the Firm received generally positive contemporaneous reviews in economics journals (Boulding, 1964; Day, 1964; Livesey, 1964; Winter, 1964). Kenneth Boulding observed that the book “reports some of the most lively and advanced research, and even thought, in this field to date” (592). In a similar vein, Sidney Winter noted “this book delivers a major blow to that battered but hitherto unshaken intellectual construct, the theory of the profit-maximizing firm. Its importance derives from the fact that it presents a well-elaborated alternative theory
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that stands up well under the tests of both systematic and causal empiricism, rather than from any novelty in the criticisms it levels against orthodoxy. . . Those who have not heard the distant rumblings of the ‘behavioral revolution’ will be surprised at the momentum it has achieved. The final verdict cannot be predicted, but this book should at least convince most economists that the revolutionaries bear watching” (148). Richard Day added, “It is inevitable that economic theory, when used to explain and predict the activities of real going concerns in agriculture and industry, should undergo a radical reorientation. From a concern with the substance of production and rational choice, emphasis has shifted to processes of production and decision-making. . . . The authors provide a convincing argument for giving organizational structure and behavior a prominent place in the theory of the firm. . . . the book should be read by every serious student of microeconomics” (462). This special issue can be interpreted as one kind of confirmation of those elements of optimism. A Behavioral Theory of the Firm has accumulated the conventional citation accouterments of impact, has been re-issued as a second edition (Cyert and March, 1992), and continues to have a reputation as an enduring “classic.” Despite its focus on the firm, the book has had influence outside of economics (Allison, 1971; Carter, 1971; March and Shapira, 1982; Olsen, 2007). Its major impact has, however, been on studies of management and organization (Engwall and Danell, 2002; Argote and Greve, 2007). The story within mainstream economics has been less straightforward. As long as the primary focus of the theory of the firm was on the aggregate outcomes of interaction among rational actors, the book’s role in economics was limited. As Cyert and March noted, “Ultimately, a new theory of firm decision making behavior might be used as a basis for a theory of markets, but at least in the short run we should distinguish between a theory of microbehavior, on the one hand, and the micro-assumptions appropriate to a theory of aggregate economic behavior on the other. In the present volume we will argue that we have developed the rudiments of a reasonable theory of firm decision making” (1963, 16). As interest in economics moved slowly toward greater concern with behavioral microassumptions, ideas consistent with Cyert and March (1963) became more prominent (Kay, 1979; Day and Sunder, 1996; Day, 2002), although with hesitations and qualifications (Baumol and Stewart, 1971; Williamson and Winter, 1991). Elements of a behavioral view of the firm can now be found in many modern developments in economics, but especially in transaction cost economics (Williamson, 1996, 2002), evolutionary theory (Nelson and Winter, 1982, 2002; Winter, 1986; Dosi, 2004), and organizational economics (Gibbons, 2003). Behavioral ideas have been elaborated not only in theories of the firm but also in collateral areas of economics, such as strategic management (Rumelt et al., 1991), organization theory (Argote and Greve, 2007), and the psychological foundations of economic choice (Tversky and Kahneman, 1974; Kahneman and Tversky, 1979; Camerer et al., 2004). Ideas of bounded rationality, conflict, learning, and routines are now commonplace, as is the general idea that economic behavior is guided by principles of human behavior. Although those ideas have many ancestors, A Behavioral Theory of the Firm probably contributed some modest amount of DNA. The early reviewers, writing in 1964, did not entirely foretell the future. They did not anticipate the steadfast retention of neoclassical commitments to unbounded rationality and unrealistic conceptions of the firm, nor did they foretell the detailed directions that ideas from A Behavioral Theory of the Firm might take in economics, as evidenced by the papers in this issue. The historical meanders are reminders, if any are needed, of the limits of futurology, and we have no illusions in that respect. The future of some variety of behavioral economics seems assured, but its precise directions seem murky, encompassing as they do everything from neuroscience to evolutionary
M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6
5
biology, cognitive psychology, finance, demography, and linguistics. It seems likely that Cyert and March had only the foggiest idea of where the ideas would wander in 50 years. Modern contributors are probably no better equipped to look 50 years ahead. The wanderers are vigorous; but the terrain is unknown and shifting, and the fog has not lifted. Acknowledgements The work has been supported by a grant from the Cynthia and John Reed Foundation. We are grateful for the help and contributions of the editors, Richard Day and Barkley Rosser, the managing editor, Debra Dove, and the authors of the papers published here. Since its initial appearance in 1980, this journal has been one of the more important places for the propagation of behavioral ideas into economics. This sustained commitment reflects the admirable tenacity and imagination of the journal’s editors, for which the field of economics may appropriately be grateful. References Allison, G., 1971. Essence of Decision: Explaining the Cuban Missile Crisis. Little Brown, Boston, MA. Argote, L., Greve, H., 2007. A behavioral theory of the firm—40 years and counting: introduction and impact. Organization Science 18, 337–349. Baumol, W.J., 1959. Business Behavior, Value and Growth. McMillan, New York, NY. Baumol, W.J., 1962. The theory of expansion of firms. American Economic Review 52, 1078–1087. Baumol, W.J., Stewart, M., 1971. On the behavioral theory of the firm. In: Marris, R., Wood, A. (Eds.), The Corporate Economy. Growth, Competition and Innovation Power. Macmillan, London, UK, pp. 118–143. Boulding, K.E., 1964. Book review: a behavioral theory of the firm. American Journal of Sociology 29, 592–593. Camerer, C.F., Lowenstein, G., Rabin, M. (Eds.), 2004. Advances in Behavioral Economics. Princeton University Press, Princeton, NJ. Carter, E.E., 1971. The behavioral theory of the firm and top level decisions. Administrative Science Quarterly 16, 413–428. Cooper, W.W., 2004. Memorial to Herbert A. Simon. In: Augier, M., March, J.G. (Eds.), Models of a Man: Essays in Memory of Herbert A. Simon. MIT Press, Cambridge, MA, pp. 67–74. Cyert, R.M., March, J.G., 1955. Organizational structure and pricing behavior in an oligopolistic market. American Economic Review 45, l29–l39. Cyert, R.M., March, J.G., 1956. Organizational factors in the theory of oligopoly. Quarterly Journal of Economics 70, 44–64. Cyert, R.M., March, J.G., 1959a. Reply. Quarterly Journal of Economics 73, 684–685. Cyert, R.M., March, J.G., 1959b. A behavioral theory of organizational objectives. In: Haire, Mason (Eds.), Modern Organization Theory. Wiley, New York, NY, pp. 76–90. Cyert, R.M., March, J.G., 1963. A Behavioral Theory of the Firm. Prentice Hall, Endlewood Cliffs, NJ. Cyert, R.M., March, J.G., 1992. A Behavioral Theory of the Firm, 2nd ed. Blackwell, Oxford, UK. Cyert, R.M., Dill, W.R., March, J.G., 1958a. The role of expectations in business decision-making. Administrative Science Quarterly 3, 309–340. Cyert, R.M., Feigenbaum, E.A., March, J.G., 1958b. Models in a behavioral theory of the firm. Behavioral Science 4, 8l–95. Cyert, R.M., March, J.G., Starbuck, W., 1961. Two experiments on organizational estimation under conflict of interest. Management Science 7, 254–264. Day, R.H., 1964. Review of ‘A Behavioral Theory of the Firm’. Econometrica 32, 461–465. Day, R.H., 2002. Adapting, learning, economizing and economic evolution. In: Augier, M., March, J.G. (Eds.), The Economics of Choice, Change and Organization: Essays in Honor of Richard M. Cyert. Edward Elgar, Cheltenham, UK, pp. 219–236. Day, R.H., Sunder, S., 1996. Ideas and work of Richard M. Cyert. Journal of Economic Behavior and Organization 31, 139–148.
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Dosi, G., 2004. A very reasonable objective still beyond our reach: economics as an empirically disciplined social science. In: Augier, M., March, J.G. (Eds.), Models of a Man: Essays in Memory of Herbert A. Simon. MIT Press, Cambridge, MA. Engwall, L., Danell, R., 2002. The behavioral theory of the firm in action. In: Augier, M., March, J.G. (Eds.), The Economics of Choice, Change and Organization: Essays in Memory of Richard M. Cyert. Edward Elgar, Cheltenham, UK, pp. 27–47. Feigenbaum, E.A., March, J.G., 1960. Latent motives, group discussion, and the ’quality’ of group decisions in a nonobjective decision problem. Sociometry 23, 50–56. Gibbons, R., 2003. Team theory, garbage cans, and real organizations. Industrial and Corporate Change 12, 753–787. Holt, C.C., 2004. Rational forecasting, learning, and decision making. In: Augier, M., March, J.G. (Eds.), Models of a Man: Essays in Memory of Herbert A. Simon. MIT Press, Cambridge, MA, pp. 355–363. Kahneman, D., Tversky, A., 1979. Prospect theory: an analysis of decision under risk. Econometrica 47, 263–291. Kay, N.M., 1979. The Innovating Firm: A Behavioral Theory of Corporate R&D. St. Martin’s Press, New York, NY. Koopmans, T., 1957. Three Essays on the State of Economic Science. McGraw Hill, New York, NY. Leslie, S., 1993. The Cold War and American Science. Columbia University Press, New York, NY. Livesey, F., 1964. Book review: a behavioral theory of the firm: attempts to develop a theory of the firm which is based on empirical studies of decision-making within the firm. Economic Journal 74, 200–202. March, J.G., 1962. The business firm as a political coalition. Journal of Politics 24, 662–678. March, J.G., 2007. Scholarship, scholarly institutions, and scholarly communities. Organization Science 18, 537–542. March, J.G., Shapira, Z., 1982. Behavioral decision theory and organizational decision theory. In: Ungson, G., Braunstein, D. (Eds.), Decision Making: An Interdisciplinary Inquiry. Kent Publishing Company, Boston, MA, pp. 92–115. March, J.G., Simon, H.A., 1958. Organizations. Wiley, New York, NY. Marris, R., 1964. Economic Theory and ‘Managerial’ Capitalism. Free Press, New York, NY. Marschak, J., Radner, R., 1972. The Economic Theory of Teams. Yale University Press, New Haven, CT. Modigliani, F., 2001. Adventures of an Economist. Texere, New York, NY. Nelson, R., Winter, S., 1982. An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge, MA. Nelson, R., Winter, S., 2002. Evolutionary theorizing in economics. Journal of Economic Literature 16, 23–46. Olsen, J.P., 2007. Europe in Search of Political Order: An Institutional Perspective on Unity/Diversity, Citizens/Their Helpers, Democratic Design/Historical Drift and the Co-existence of Orders. Oxford University Press, Oxford, UK. Rumelt, R., Schendel, D., Teece, D., 1991. Strategic management and economics. Strategic Management Journal 12, 5–29. Simon, H.A., 1955. A behavioral model of rational choice. Quarterly Journal of Economics 69, 99–118. Simon, H.A., 1956. Rational choice and the structure of the environment. Psychological Review 63, 129–138. Simon, H.A., 1991. Models of My Life. MIT Press, Cambridge, MA. Tversky, A., Kahneman, D., 1974. Judgment under uncertainty: heuristics and biases. Science 185, 1124–1131. Williamson, O.E., 1996. Transaction cost economics and the Carnegie connection. Journal of Economic Behavior and Organization 31, 149–155. Williamson, O.E., 2002. Empirical microeconomics: another perspective. In: Augier, M., March, J.G. (Eds.), The Economics of Choice, Change and Organization: Essays in Honor of Richard M. Cyert. Edward Elgar, Cheltenham, UK, pp. 419–441. Williamson, O.E., Winter, S. (Eds.), 1991. The Nature of the Firm: Origins, Evolution, and Development. Oxford University Press, Oxford, UK. Winter, S.G., 1964. Review of ‘A Behavioral Theory of the Firm’. American Economic Review 54, 144–148. Winter, S.G., 1986. The research program of the behavioral theory of the firm: orthodox critique and evolutionary perspective. In: Gilad, B., Kaish, S. (Eds.), Handbook of Behavioral Economics, vol. I. JAI Press, Greenwich, CT, pp. 151–187. Zachary, R., 1999. The Endless Frontier. MIT Press, Cambridge, MA.
A retrospective look at A Behavioral Theory of the Firm Mie Augier ∗ , James G. March Stanford University, United States Available online 9 February 2008
Abstract The papers in this special issue focus on ideas associated with a book published 45 years ago, A Behavioral Theory of the Firm (Cyert, R.M., March, J.G., 1963. A Behavioral Theory of the Firm. Endlewood Cliffs. Prentice Hall, NJ). The book proposed the introduction of a few more realistic behavioral assumptions into the economic theory of the firm. The papers presented here examine some aspects of the history of the ideas found in the book, extend and elaborate the ideas in the context of current research, and indicate possible directions for future research in the behavioral tradition. We will not attempt to summarize the papers, but will try to locate them gently in their historical and intellectual context. © 2008 Elsevier B.V. All rights reserved. JEL classification: b2; L1 Keywords: Social and behavioral sciences; Post-war; Economics; Theory of the firm
1. A little history The immediate post-Second World War period was an era that venerated science (Leslie, 1993; Zachary, 1999). The social and behavioral sciences became more quantitative, more analytical, and more committed to scientific principles. Economic theory, for example, became substantially more mathematical. At the same time, leading economists (not all of them to be sure) became interested in the possibilities of making economic theory more attentive to the other social sciences and to the realities of economic behavior by real humans in real institutions (e.g. Koopmans, 1957; Baumol, 1959, 1962; Marris, 1964; Marschak and Radner, 1972). A Behavioral Theory of the Firm was embedded in, and reflects, those post-war intellectual enthusiasms of economics and behavioral social science. ∗
Corresponding author. Tel.: +1 650 723 9898. E-mail address: [email protected] (M. Augier).
0167-2681/$ – see front matter © 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2008.01.005
2
M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6
The book was also a product of a specific academic institution that was notorious for its vigor, the Graduate School of Industrial Administration (GSIA) at the Carnegie Institute of Technology (predecessor to Carnegie Mellon University) (Williamson, 1996; March, 2007). GSIA became a poster child for an invigoration of fundamental interdisciplinary research within business schools seeking deeper understandings in fields such as accounting, finance, marketing, operations research, microeconomics, and organizations. Some recitations of the importance of the GSIA setting can be found in the writings of those who were there (see, e.g. Williamson, 1996, 2002; Modigliani, 2001; Holt, 2004; Cooper, 2004; March, 2007; Simon, 1991). A Behavioral Theory of the Firm was a product of that milieu. Work on the book at GSIA overlapped in time and personnel with another well-known book of the period, Organizations (March and Simon, 1958), and the so-called “Carnegie School” in organization theory is largely defined by these two books. Although the books were written by only three people, the active research culture within which they were embedded included faculty colleagues such as William W. Cooper, Harold Guetzkow, Charles Holt, Franco Modigliani, Allan Newell, and Harrison White, and graduate students such as William Dill, Edward Feigenbaum, Julian Feldman, John Muth, William Starbuck, and Oliver Williamson. This group shared a dedication to reconstructing the economic theory of the firm, though they differed to some extent in the precise directions of their preferred changes and in the fervor of their messianic inclinations. 2. The “Carnegie School” and the behavioral tradition The triumvirate of Cyert, March, and Simon was the core group for the Carnegie pursuit of an understanding of the firm and other organizations. The behavioral view that was developed at GSIA appeared primarily, but not exclusively, in economic journals initially, but it drew tools, concepts and insights not only from economics, but also from anthropology, political science, psychology, and sociology. Those concepts and general ideas included the notions that decisions are intendedly rational but bounded by human and institutional limitations, that organizations accumulate and use slack, that attention is a scarce resource, that firms satisfice with respect to aspiration levels, that firms adjust expectations and aspirations over time in response to experience, and that firms can be seen as coalitions of individuals and groups with conflicting goals (March and Simon, 1958; Cyert and March, 1963). The basic satisficing kernel was presented in two early pieces written by Simon (Simon, 1955, 1956). The development of ideas of slack, organizational learning, conflict, and search came in the two books and the articles on which they were based (Cyert and March, 1955, 1956, 1959a,b; Cyert et al., 1961, 1958a,b; Feigenbaum and March, 1960; March, 1962). In retrospect, one can think of the two books as having different objectives, more than different ideas. Organizations was an attempt to create an inventory, to organize everything that might be alleged to be known about organization theory, whereas A Behavioral Theory of the Firm was more oriented towards finding something relevant to say about a new theory of the firm. There were, however, differences in the substantive emphases of the two books. Conflict of interest and organizational learning were discussed in Organizations, but they were more central to A Behavioral Theory of the Firm. The idea of organizational slack was more important in Cyert and March than it was in March and Simon, as were the ideas of uncertainly avoidance and the sequential attention to goals. On the other hand, classical issues such as satisfaction, planning, motivation, and organizational design were more important in March and Simon than in Cyert and March.
M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6
3
At the center of A Behavioral Theory of the Firm was the idea that a firm is an adaptive political coalition, a coalition between different individuals and groups of individuals in the firm, each having different goals and hence possibly in conflict. “Since the existence of unresolved conflict is a conspicuous feature of organizations”, the authors stated, “it is exceedingly difficult to construct a useful positive theory of organizational decision making if we insist on internal goal consistency. As a result, recent theories of organizational objectives describe goals as the result of a continuous bargaining-learning process. Such a process will not necessarily produce consistent goals” (28). Although they shared a general emphasis on decision making with March and Simon, Cyert and March saw firms as operating less through calculated decisions than through routines (standard operating procedures). Experience is embodied in standard operating procedures, rules reflecting solutions to problems that the firm has managed to solve in the past and negotiated resolutions of past conflicts. As time passes and experience changes, the firm’s routines change through processes of organizational search, learning, and negotiation. As a result, the firm is seen as a system of rules that change over time in response to experience, as that experience is interpreted in terms of the relation between performance and aspirations and in terms of multiple, conflicting goals. To elaborate those basic ideas, A Behavioral Theory of the Firm proposed a set of ideas about organizational goals, expectations, and choice. Goals were seen as being defined by the coalition members and represented by aspiration levels that distinguished between outcomes that were good enough and those that were not. Expectations were seen as being based on feedback and search, possibly biased, and possibly disputed within the firm. Choice was seen as problem-oriented and organized by standard operating procedures and by patterns of attention. Each of these processes was pictured as shaped by the use of human actors as instruments. These ideas were developed in terms of four major concepts. The first was the quasi-resolution of conflict. Coping with conflict, without necessarily resolving it, involves factoring problems into subproblems and delegating authority to solve the subproblems (not necessarily consistently), using acceptable level criteria that avoid the necessity of trade-offs to identify the one best solution, and attending to goals sequentially rather than simultaneously. The second concept was uncertainty avoidance. Firms avoid the necessity of confronting uncertainty by delaying decisions until the uncertainty is resolved through the unfolding of events, and by negotiating their internal and external environments through budgets and contracts. The third concept was problemistic search. Search is assumed to be motivated by problems, simple-minded in its causal models, and biased by goals and experiences. The fourth concept was organizational learning. Firms adapt their aspiration levels to their own experience and the experience of others. They adapt their attention and search rules to experience. Because they see different things and evaluate things differently, different parts of the organization learn different things from the same historical events. 3. Economics and the behavioral tradition A Behavioral Theory of the Firm received generally positive contemporaneous reviews in economics journals (Boulding, 1964; Day, 1964; Livesey, 1964; Winter, 1964). Kenneth Boulding observed that the book “reports some of the most lively and advanced research, and even thought, in this field to date” (592). In a similar vein, Sidney Winter noted “this book delivers a major blow to that battered but hitherto unshaken intellectual construct, the theory of the profit-maximizing firm. Its importance derives from the fact that it presents a well-elaborated alternative theory
4
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that stands up well under the tests of both systematic and causal empiricism, rather than from any novelty in the criticisms it levels against orthodoxy. . . Those who have not heard the distant rumblings of the ‘behavioral revolution’ will be surprised at the momentum it has achieved. The final verdict cannot be predicted, but this book should at least convince most economists that the revolutionaries bear watching” (148). Richard Day added, “It is inevitable that economic theory, when used to explain and predict the activities of real going concerns in agriculture and industry, should undergo a radical reorientation. From a concern with the substance of production and rational choice, emphasis has shifted to processes of production and decision-making. . . . The authors provide a convincing argument for giving organizational structure and behavior a prominent place in the theory of the firm. . . . the book should be read by every serious student of microeconomics” (462). This special issue can be interpreted as one kind of confirmation of those elements of optimism. A Behavioral Theory of the Firm has accumulated the conventional citation accouterments of impact, has been re-issued as a second edition (Cyert and March, 1992), and continues to have a reputation as an enduring “classic.” Despite its focus on the firm, the book has had influence outside of economics (Allison, 1971; Carter, 1971; March and Shapira, 1982; Olsen, 2007). Its major impact has, however, been on studies of management and organization (Engwall and Danell, 2002; Argote and Greve, 2007). The story within mainstream economics has been less straightforward. As long as the primary focus of the theory of the firm was on the aggregate outcomes of interaction among rational actors, the book’s role in economics was limited. As Cyert and March noted, “Ultimately, a new theory of firm decision making behavior might be used as a basis for a theory of markets, but at least in the short run we should distinguish between a theory of microbehavior, on the one hand, and the micro-assumptions appropriate to a theory of aggregate economic behavior on the other. In the present volume we will argue that we have developed the rudiments of a reasonable theory of firm decision making” (1963, 16). As interest in economics moved slowly toward greater concern with behavioral microassumptions, ideas consistent with Cyert and March (1963) became more prominent (Kay, 1979; Day and Sunder, 1996; Day, 2002), although with hesitations and qualifications (Baumol and Stewart, 1971; Williamson and Winter, 1991). Elements of a behavioral view of the firm can now be found in many modern developments in economics, but especially in transaction cost economics (Williamson, 1996, 2002), evolutionary theory (Nelson and Winter, 1982, 2002; Winter, 1986; Dosi, 2004), and organizational economics (Gibbons, 2003). Behavioral ideas have been elaborated not only in theories of the firm but also in collateral areas of economics, such as strategic management (Rumelt et al., 1991), organization theory (Argote and Greve, 2007), and the psychological foundations of economic choice (Tversky and Kahneman, 1974; Kahneman and Tversky, 1979; Camerer et al., 2004). Ideas of bounded rationality, conflict, learning, and routines are now commonplace, as is the general idea that economic behavior is guided by principles of human behavior. Although those ideas have many ancestors, A Behavioral Theory of the Firm probably contributed some modest amount of DNA. The early reviewers, writing in 1964, did not entirely foretell the future. They did not anticipate the steadfast retention of neoclassical commitments to unbounded rationality and unrealistic conceptions of the firm, nor did they foretell the detailed directions that ideas from A Behavioral Theory of the Firm might take in economics, as evidenced by the papers in this issue. The historical meanders are reminders, if any are needed, of the limits of futurology, and we have no illusions in that respect. The future of some variety of behavioral economics seems assured, but its precise directions seem murky, encompassing as they do everything from neuroscience to evolutionary
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biology, cognitive psychology, finance, demography, and linguistics. It seems likely that Cyert and March had only the foggiest idea of where the ideas would wander in 50 years. Modern contributors are probably no better equipped to look 50 years ahead. The wanderers are vigorous; but the terrain is unknown and shifting, and the fog has not lifted. Acknowledgements The work has been supported by a grant from the Cynthia and John Reed Foundation. We are grateful for the help and contributions of the editors, Richard Day and Barkley Rosser, the managing editor, Debra Dove, and the authors of the papers published here. Since its initial appearance in 1980, this journal has been one of the more important places for the propagation of behavioral ideas into economics. This sustained commitment reflects the admirable tenacity and imagination of the journal’s editors, for which the field of economics may appropriately be grateful. References Allison, G., 1971. Essence of Decision: Explaining the Cuban Missile Crisis. Little Brown, Boston, MA. Argote, L., Greve, H., 2007. A behavioral theory of the firm—40 years and counting: introduction and impact. Organization Science 18, 337–349. Baumol, W.J., 1959. Business Behavior, Value and Growth. McMillan, New York, NY. Baumol, W.J., 1962. The theory of expansion of firms. American Economic Review 52, 1078–1087. Baumol, W.J., Stewart, M., 1971. On the behavioral theory of the firm. In: Marris, R., Wood, A. (Eds.), The Corporate Economy. Growth, Competition and Innovation Power. Macmillan, London, UK, pp. 118–143. Boulding, K.E., 1964. Book review: a behavioral theory of the firm. American Journal of Sociology 29, 592–593. Camerer, C.F., Lowenstein, G., Rabin, M. (Eds.), 2004. Advances in Behavioral Economics. Princeton University Press, Princeton, NJ. Carter, E.E., 1971. The behavioral theory of the firm and top level decisions. Administrative Science Quarterly 16, 413–428. Cooper, W.W., 2004. Memorial to Herbert A. Simon. In: Augier, M., March, J.G. (Eds.), Models of a Man: Essays in Memory of Herbert A. Simon. MIT Press, Cambridge, MA, pp. 67–74. Cyert, R.M., March, J.G., 1955. Organizational structure and pricing behavior in an oligopolistic market. American Economic Review 45, l29–l39. Cyert, R.M., March, J.G., 1956. Organizational factors in the theory of oligopoly. Quarterly Journal of Economics 70, 44–64. Cyert, R.M., March, J.G., 1959a. Reply. Quarterly Journal of Economics 73, 684–685. Cyert, R.M., March, J.G., 1959b. A behavioral theory of organizational objectives. In: Haire, Mason (Eds.), Modern Organization Theory. Wiley, New York, NY, pp. 76–90. Cyert, R.M., March, J.G., 1963. A Behavioral Theory of the Firm. Prentice Hall, Endlewood Cliffs, NJ. Cyert, R.M., March, J.G., 1992. A Behavioral Theory of the Firm, 2nd ed. Blackwell, Oxford, UK. Cyert, R.M., Dill, W.R., March, J.G., 1958a. The role of expectations in business decision-making. Administrative Science Quarterly 3, 309–340. Cyert, R.M., Feigenbaum, E.A., March, J.G., 1958b. Models in a behavioral theory of the firm. Behavioral Science 4, 8l–95. Cyert, R.M., March, J.G., Starbuck, W., 1961. Two experiments on organizational estimation under conflict of interest. Management Science 7, 254–264. Day, R.H., 1964. Review of ‘A Behavioral Theory of the Firm’. Econometrica 32, 461–465. Day, R.H., 2002. Adapting, learning, economizing and economic evolution. In: Augier, M., March, J.G. (Eds.), The Economics of Choice, Change and Organization: Essays in Honor of Richard M. Cyert. Edward Elgar, Cheltenham, UK, pp. 219–236. Day, R.H., Sunder, S., 1996. Ideas and work of Richard M. Cyert. Journal of Economic Behavior and Organization 31, 139–148.
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