39 Pages Posted: 24 Nov 1997 Last revised: 18 May 2013
Date Written: July 1, 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.
Notes: Sadly, Dr. Meckling, Dean Emeritus of the Simon School, died in May 1998.
Keywords: Human behavior, Rationality, Altruism, Self Interest, Perfect Agents, Sociology, Agency Costs
JEL Classification: A12, A13, B31, D20, D23, J20
Suggested Citation: 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