The Nature of Man
Michael C. Jensen
Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
William H. Meckling
Simon School, University of Rochester (Deceased)
July 1, 1994
Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998
Journal of Applied Corporate Finance, Vol. 7, No. 2, pp. 4-19, Summer 1994
Understanding human behavior is fundamental to understanding how organizations function, whether they are profit-making firms, non-profit enterprises, or government agencies. Much disagreement among managers, scientists, policy makers, and citizens arises from substantial differences in the way we think about human nature -- about their strengths, frailties, intelligence, ignorance, honesty, selfishness, and generosity. In this paper we discuss five alternative models of human behavior that are commonly used (though usually implicitly). They are the Resourceful, Evaluative, Maximizing Model (REMM), Economic (or Money Maximizing) Model, Psychological (or Hierarchy of Needs) Model, Sociological (or Social Victim) Model, and the Political (or Perfect Agent) Model. We argue that REMM best describes the systematically rational part of human behavior. It serves as the foundation for the agency model of financial, organizational, and governance structure of firms.
The growing body of social science research on human behavior has a common message: Whether they are politicians, managers, academics, professionals, philanthropists, or factory workers, individuals are resourceful, evaluative maximizers. They respond creatively to the opportunities the environment presents, and they work to loosen constraints that prevent them from doing what they wish. They care about not only money, but about almost everything -- respect, honor, power, love, and the welfare of others. The challenge for our society, and for all organizations in it, is to establish rules of the game that tap and direct human energy in ways that increase rather than reduce the effective use of our scarce resources.
See also the related paper by Jensen Self Interest, Altruism, Incentives, and Agency Theory.
Note: Sadly, Dr. Meckling, Dean Emeritus of the Simon School, died in May 1998.
Number of Pages in PDF File: 39
Keywords: Human behavior, Rationality, Altruism, Self Interest, Perfect Agents, Sociology, Agency Costs
JEL Classification: A12, A13, B31, D20, D23, J20Accepted Paper Series
Date posted: November 24, 1997 ; Last revised: May 18, 2013
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