a behavioral theory of the firm (cyert and march, 1963)
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The Behavioral Theory of The
Firm (1963)
Richard M. Cyert and James G March
Carnegie Institute of Technology
Citations: 14,451
Richard Michael Cyert (1921- 1998)
• Education
• B.S. from the University of Minnesota
• Ph. D in economics from Columbia
University
• Career
• Taught statistics, accounting and
industrial administration at Carnegie
Institute of Technology (1948- 1962)
• Sixth president of Carnegie Mellon
University (1972- 1990)
About Carnegie School (1950s, 60s)
• Influenced by setting up of Graduate
School of Industrial Administration (GSIA)
at CMU promoting inter-disciplinary
research
• Freshwater school proposing that
macroeconomics has to be dynamic,
quantitative, and based on how
individuals and institutions make
decisions under uncertainty.
• Research on organizational behavior,
decision sciences and management
sciences, with application of psychology
• Key proponents being Herbert Simon,
James March and Richard Cyert
• Later influenced the work of Williamson
James Gardner March (1928)
• Education
• B.A. from the University of Wisconsin
• M.A. and Ph.D. from Yale University
• Career
• Carnegie Institute of Technology
(1953- 1970)
• Stanford University (1970 onwards)
• Written seven books of poetry and
made a film (called “Don Quixote’s
Lessons for Leadership”).
• Notable academic collaboration with
• Herbert Simon, Organizational (1958)
• Richard Cyert, Behavioral Theory
(1963)
• Olsen and Cohen, Garbage Can
model (1972)
A polymath whose career has encompassed numerous disciplines … he has
taught courses on subjects as diverse as organizational psychology, behavioral
economics, leadership, rules for killing people, friendship, decision-making,
models in social science, revolutions, computer simulation and statistics
- Harvard Business Review
Theory of the Firm and research
commitments • Must offers answers to
• Existence – why do firms emerge, why are not all transactions in the economy
mediated over the market?
• Boundaries – why is the boundary between firms and the market located exactly
there as to size and output variety? Which transactions are performed internally and
which are negotiated on the market?
• Organization – why are firms structured in such a specific way, for example as to
hierarchy or decentralization? What is the interplay of formal and informal
relationships?
• Heterogeneity of firm actions/performances – what drives different actions and
performances of firms?
• Major research commitments of this work
• Focus on small number of key economic decisions made by the firm
• Develop process oriented model of the firm
• Link models of the firm as closely as possible to empirical observations
• Develop a theory with generality beyond the specific firm studies
Key ideas
• Challenged the central tenets of the
existing theory of the firm:
• Profit maximization
• Perfect knowledge (equilibrium position)
• Ignores the decision making process of
internal resource allocation
• Modern firms have some influence over
market because of the way they are
internally organized
• Organizations are coalitions of people
with independent goals
• Organizational goals are never fully
resolved
• Organization slack
• Problemistic search
• Boundedness of managerial behavior
(satisficing)
• Firm as an adaptive system
• Need for standard operating procedures,
with both generic and specific rules
• Quasi-resolution of conflicts
• Uncertainty avoidance
• Problemistic search
• Organizational learning
Organizational goals
• Organizational goals could be defined
either by the goals of an entrepreneur, or
as consensual goals.
• Ways of determining objectives in a
coalition
• Formulation through bargaining
• Stabilization and elaboration through mutual
control systems
• Adjustment to experience
• Organizational slack
• Difference between total resources and
necessary payment, due to information
asymmetry and slow adaptation
• Plays a stabilizing and adaptive role
• Goals are a series of more of less
independent constraints imposed on
organization through a process of
bargaining among potential coalition
members and elaborated over time in
response to short-run pressures.
• Firm as a coalition of people
• Comprises of managers, workers, suppliers,
and investors, among others, not a peak
coordinator
• Participating in goal setting and decision
making
• Key goals are: production; inventory; market
share; sales and profits
• Difference in priorities leads to goal conflict
• Conflicts are never fully resolved in an
organization
• All goals must be satisfied, and hence need
for priority
Organizational expectations
• Expectations aren’t independent of
hopes, wishes and internal bargaining
needs of subunits
• Coalition doesn’t require completeness or
consistency in information on
consequences of decisions
• Biases have both unconscious and
unconscious biases
• Problemistic search
• Gets triggered at specific instances
• Search is much more intensive when
organizational slack is small than when it
is large
• Not only organizations look for
alternatives, but alternatives also look for
organizations
• Organizations use simple decision criteria
• Communication includes considerable biasing,
but also considerable bias correction
Organizational choice
• Partial model of organizational choices
• Forecast competitor's behavior
• Forecast demand
• Estimate costs
• Simplify objectives
• Evaluate plan
• Re-examine cost
• Re-examine demand
• Re-examine objectives
• Select alternatives
• Firm in an adaptive system
• Each combination of external shocks and
internal decision variables changes the
state of the firm
• Better decision rules are retained, and
others are filtered out
• Standard operating procedure (SOPs) as
learned set of behavioral rules . Results
of long-run adaptive process through
which firms learn
• General choice procedure:
• Avoid uncertainty (rather than forecasting
the environment)
• Maintain the rules and
• Use simple rules;
• Specific SOPs types
• Task performance rules
• Continuing records and reports
• Information- handling rules
• Plans
• In short-run SOPs dominate decision
making
Major relational concepts
• Quasi-resolution of conflicts
• Goals are independent aspiration- level
constraints
• Local rationality
• Weaker rules of consistency
• Sequential attention to goals
• Uncertainty avoidance
• Adoption of decision rules
• Solve pressing problems, than develop long
range strategies (avoid planning)
• Rearranging a negotiated environment
(internal and external)
• Feedback- react decision procedure
• Problemistic search
• Akin to decision making, search is problem-
directed
• Motivated (identified when firm fails to
satisfy one or more of its goals)
• Simple minded (search in neighborhood of
problem symptom, and in neighborhood of
current alternatives)
• Biased (reflecting special training,
interaction of hopes and expectations, and
communication bias)
• Organizational learning
• Adaptation of goal
• Adaptation of attention rules
• Adaptation of search rules
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