Behavioural Theories of the Firm

Background

Behavioural theories of the firm stem from examining the varying objectives and motivational forces acting upon individuals and groups within a company. These theories move beyond the canonical idea that firms are purely profit-maximizing entities and suggest that internal behaviours, desires, and objectives can significantly influence decision-making.

Historical Context

The roots of behavioural theories of the firm can be traced back to the mid-20th century. Pioneers such as Richard M. Cyert and James G. March fundamentally challenged the traditional neoclassical views with their seminal work “A Behavioral Theory of the Firm” in 1963. This period saw a rise in interdisciplinary approaches to economics, incorporating psychological and sociological insights into economic models.

Definitions and Concepts

1. Profit Maximization: Orthodox models assume firms aim to maximize their profits subject to constraints like technology and market conditions.
2. Risk Aversion: An additional nuance in traditional theories where firms are seen to balance potential profits with associated risks.
3. Satisficing: A term coined by Herbert A. Simon, referring to firms making satisfactory rather than optimal decisions due to limited information and cognitive capacities.
4. Managerial Perquisites: Non-monetary benefits enjoyed by managers, such as corporate jets or luxury offices.
5. Empire-building: Activities undertaken by managers to expand the size and scope of the firm for power and prestige rather than profit.

Major Analytical Frameworks

Classical Economics

Classical theories did not deeply concern themselves with behavioural aspects of firms, rather focusing on markets and resource allocation.

Neoclassical Economics

Neoclassical theories maintained the focus on profit maximization but sometimes included allowances for risk aversion in decision-making.

Keynesian Economics

While focusing primarily on macroeconomic issues, Keynesian frameworks occasionally touched upon firm behavior in the context of broader economic policies and demand management.

Marxian Economics

Marxist perspectives would see firm behaviour as driven by broader class struggles but often didn’t delve into intra-firm dynamics seen in behavioural theories.

Institutional Economics

Institutional economics aligns more closely with behavioural theories as it examines how institutions, including firms, are influenced by historical, social, and psychological factors.

Behavioral Economics

This branch especially supports behavioural theories of the firm, emphasizing deviations from the rational actor model, with focus on bounded rationality, heuristics, and biases.

Post-Keynesian Economics

Post-Keynesian models often examine real-world complexities of firms, critically analyzing simplistic assumptions of firm behaviour in traditional economics.

Austrian Economics

Austrian theories might critique behavioural models for emphasizing subjective views of firm behaviour, but they share commonalities in rejecting rigid mathematical modelling.

Development Economics

Developmental perspectives might adopt behavioural aspects to understand firm growth and management in diverse economic contexts, factoring in regional, cultural, and informational variances.

Monetarism

Typically focused on macroeconomic phenomena, monetarism concerns itself less with firm level behavioural nuances.

Comparative Analysis

Behavioural theories offer a richer, more nuanced picture of firm behaviour compared to traditional models by incorporating motivations, internal politics, and human psychology. This contrast is sharply visible when comparing models like perfect competition from neoclassical views versus behavioural theories that allow for non-profit maximization objectives.

Case Studies

Examining firms such as Apple and its innovative drives, or conglomerates like GE focusing on power and market scope, offers practical insights. Understanding managerial motivations in these companies can explain decisions that might not align strictly with profit maximization.

Suggested Books for Further Studies

1. “A Behavioral Theory of the Firm” by Richard M. Cyert and James G. March.
2. “Administrative Behavior” by Herbert A. Simon.
3. “Managerial Economics and Organizational Architecture” by James A. Brickley.

Related Terms with Definitions

1. Bounded Rationality: Decision-making limited by available information, cognitive limitations, and time constraints.
2. Incentive Structures: Systems of rewards and penalties that influence the behaviour of individuals within a firm.
3. Organizational Culture: Shared values, norms, and practices within an organization that shape the behaviour of its members.
4. Principal-Agent Problem: Conflicts of interest arising between principals (owners) and agents (managers) within a firm.

By understanding behavioural theories, we appreciate the complexities and disparate objectives moulding firm behaviour, offering predictive and prescriptive power beyond orthodox economic models.