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The Nature of Man

Michael C. Jensen

Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; 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, J20

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Date posted: November 24, 1997 ; Last revised: May 18, 2013

Suggested Citation

Jensen, Michael C. and Meckling, William H., The Nature of Man (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. Available at SSRN: https://ssrn.com/abstract=5471 or http://dx.doi.org/10.2139/ssrn.5471

Contact Information

Michael C. Jensen (Contact Author)
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
William H. Meckling
Simon School, University of Rochester (Deceased)

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