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