A Behavioral Theory of the Firm

Posted: 4 Nov 2009

See all articles by Richard M. Cyert

Richard M. Cyert

affiliation not provided to SSRN

James G. March

Stanford Graduate School of Business

Date Written: 1963


Provides a theory of decision making within business organizations. Contrary to the economic theory of the firm, which sees firms as profit-maximizing entities, the authors advocate a theory based on empirical observation of actual firm decision-making. Various features of firm decision-making are identified. First, firms are coalitions of participants whose individual goals may and often do conflict. How this conflict is resolved is determined by the firm's bargaining process. This process is constrained by past behavior and decisions. Second, the authors reject the notion that firms are one-dimensional profit-maximizers in favor of a view of firms as entities with many different objectives that will accept suboptimal outcomes if they are above a minimum level. Congruent with this, a firm's search activity occurs in response to a perceived problem and is limited in scope. The effect is that firm policies will change only incrementally. Also impeding radical policy change is the fact that firms react to uncertainty using standardized decision rules. Using this theory, two computer models of business decision-making are presented and compared with actual results. These models are shown to have especially good predictive power. (CAR)

Keywords: Decision making, Profit strategies, Organizational behavior, Decision theory, Conflict management, Satisficing, Adaptability, Management decisions, Organizational objectives, Search strategies, Change strategies, Uncertainty, Computational model, Behavior theories, Organizational goals, Expectations

Suggested Citation

Cyert, Richard M. and March, James G., A Behavioral Theory of the Firm (1963). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1496208

Richard M. Cyert (Contact Author)

affiliation not provided to SSRN

No Address Available

James G. March

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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