Journal of Economic Behavior & Organization

Vol. 66 (2008) 1–6

A retrospective look at A Behavioral

Theory of the Firm
Mie Augier ∗ , James G. March
Stanford University, United States
Available online 9 February 2008

Abstract
The papers in this special issue focus on ideas associated with a book published 45 years ago, A Behavioral
Theory of the Firm (Cyert, R.M., March, J.G., 1963. A Behavioral Theory of the Firm. Endlewood Cliffs.
Prentice Hall, NJ). The book proposed the introduction of a few more realistic behavioral assumptions into
the economic theory of the firm. The papers presented here examine some aspects of the history of the ideas
found in the book, extend and elaborate the ideas in the context of current research, and indicate possible
directions for future research in the behavioral tradition. We will not attempt to summarize the papers, but
will try to locate them gently in their historical and intellectual context.
© 2008 Elsevier B.V. All rights reserved.

JEL classification: b2; L1

Keywords: Social and behavioral sciences; Post-war; Economics; Theory of the firm

1. A little history

The immediate post-Second World War period was an era that venerated science (Leslie, 1993;
Zachary, 1999). The social and behavioral sciences became more quantitative, more analytical, and
more committed to scientific principles. Economic theory, for example, became substantially more
mathematical. At the same time, leading economists (not all of them to be sure) became interested
in the possibilities of making economic theory more attentive to the other social sciences and to the
realities of economic behavior by real humans in real institutions (e.g. Koopmans, 1957; Baumol,
1959, 1962; Marris, 1964; Marschak and Radner, 1972). A Behavioral Theory of the Firm was
embedded in, and reflects, those post-war intellectual enthusiasms of economics and behavioral
social science.

∗ Corresponding author. Tel.: +1 650 723 9898.

E-mail address: augier@stanford.edu (M. Augier).

0167-2681/$ – see front matter © 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.jebo.2008.01.005
2 M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6

The book was also a product of a specific academic institution that was notorious for its
vigor, the Graduate School of Industrial Administration (GSIA) at the Carnegie Institute of Tech-
nology (predecessor to Carnegie Mellon University) (Williamson, 1996; March, 2007). GSIA
became a poster child for an invigoration of fundamental interdisciplinary research within busi-
ness schools seeking deeper understandings in fields such as accounting, finance, marketing,
operations research, microeconomics, and organizations. Some recitations of the importance of
the GSIA setting can be found in the writings of those who were there (see, e.g. Williamson, 1996,
2002; Modigliani, 2001; Holt, 2004; Cooper, 2004; March, 2007; Simon, 1991). A Behavioral
Theory of the Firm was a product of that milieu.
Work on the book at GSIA overlapped in time and personnel with another well-known book
of the period, Organizations (March and Simon, 1958), and the so-called “Carnegie School” in
organization theory is largely defined by these two books. Although the books were written by
only three people, the active research culture within which they were embedded included fac-
ulty colleagues such as William W. Cooper, Harold Guetzkow, Charles Holt, Franco Modigliani,
Allan Newell, and Harrison White, and graduate students such as William Dill, Edward Feigen-
baum, Julian Feldman, John Muth, William Starbuck, and Oliver Williamson. This group shared
a dedication to reconstructing the economic theory of the firm, though they differed to some
extent in the precise directions of their preferred changes and in the fervor of their messianic
inclinations.

2. The “Carnegie School” and the behavioral tradition

The triumvirate of Cyert, March, and Simon was the core group for the Carnegie pursuit of
an understanding of the firm and other organizations. The behavioral view that was developed at
GSIA appeared primarily, but not exclusively, in economic journals initially, but it drew tools,
concepts and insights not only from economics, but also from anthropology, political science,
psychology, and sociology. Those concepts and general ideas included the notions that decisions
are intendedly rational but bounded by human and institutional limitations, that organizations
accumulate and use slack, that attention is a scarce resource, that firms satisfice with respect to
aspiration levels, that firms adjust expectations and aspirations over time in response to experience,
and that firms can be seen as coalitions of individuals and groups with conflicting goals (March
and Simon, 1958; Cyert and March, 1963). The basic satisficing kernel was presented in two early
pieces written by Simon (Simon, 1955, 1956). The development of ideas of slack, organizational
learning, conflict, and search came in the two books and the articles on which they were based
(Cyert and March, 1955, 1956, 1959a,b; Cyert et al., 1961, 1958a,b; Feigenbaum and March,
1960; March, 1962).
In retrospect, one can think of the two books as having different objectives, more than different
ideas. Organizations was an attempt to create an inventory, to organize everything that might be
alleged to be known about organization theory, whereas A Behavioral Theory of the Firm was
more oriented towards finding something relevant to say about a new theory of the firm. There
were, however, differences in the substantive emphases of the two books. Conflict of interest
and organizational learning were discussed in Organizations, but they were more central to A
Behavioral Theory of the Firm. The idea of organizational slack was more important in Cyert
and March than it was in March and Simon, as were the ideas of uncertainly avoidance and the
sequential attention to goals. On the other hand, classical issues such as satisfaction, planning,
motivation, and organizational design were more important in March and Simon than in Cyert
and March.
 M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6 3

At the center of A Behavioral Theory of the Firm was the idea that a firm is an adaptive
political coalition, a coalition between different individuals and groups of individuals in the firm,
each having different goals and hence possibly in conflict. “Since the existence of unresolved
conflict is a conspicuous feature of organizations”, the authors stated, “it is exceedingly difficult
to construct a useful positive theory of organizational decision making if we insist on internal
goal consistency. As a result, recent theories of organizational objectives describe goals as the
result of a continuous bargaining-learning process. Such a process will not necessarily produce
consistent goals” (28).
Although they shared a general emphasis on decision making with March and Simon, Cyert and
March saw firms as operating less through calculated decisions than through routines (standard
operating procedures). Experience is embodied in standard operating procedures, rules reflecting
solutions to problems that the firm has managed to solve in the past and negotiated resolutions
of past conflicts. As time passes and experience changes, the firm’s routines change through
processes of organizational search, learning, and negotiation. As a result, the firm is seen as a
system of rules that change over time in response to experience, as that experience is interpreted
in terms of the relation between performance and aspirations and in terms of multiple, conflicting
goals.
To elaborate those basic ideas, A Behavioral Theory of the Firm proposed a set of ideas about
organizational goals, expectations, and choice. Goals were seen as being defined by the coalition
members and represented by aspiration levels that distinguished between outcomes that were good
enough and those that were not. Expectations were seen as being based on feedback and search,
possibly biased, and possibly disputed within the firm. Choice was seen as problem-oriented and
organized by standard operating procedures and by patterns of attention. Each of these processes
was pictured as shaped by the use of human actors as instruments.
These ideas were developed in terms of four major concepts. The first was the quasi-resolution
of conflict. Coping with conflict, without necessarily resolving it, involves factoring problems
into subproblems and delegating authority to solve the subproblems (not necessarily consis-
tently), using acceptable level criteria that avoid the necessity of trade-offs to identify the one best
solution, and attending to goals sequentially rather than simultaneously. The second concept was
uncertainty avoidance. Firms avoid the necessity of confronting uncertainty by delaying decisions
until the uncertainty is resolved through the unfolding of events, and by negotiating their internal
and external environments through budgets and contracts. The third concept was problemistic
search. Search is assumed to be motivated by problems, simple-minded in its causal models, and
biased by goals and experiences. The fourth concept was organizational learning. Firms adapt
their aspiration levels to their own experience and the experience of others. They adapt their
attention and search rules to experience. Because they see different things and evaluate things
differently, different parts of the organization learn different things from the same historical
events.

3. Economics and the behavioral tradition

A Behavioral Theory of the Firm received generally positive contemporaneous reviews in

economics journals (Boulding, 1964; Day, 1964; Livesey, 1964; Winter, 1964). Kenneth Boulding
observed that the book “reports some of the most lively and advanced research, and even thought,
in this field to date” (592). In a similar vein, Sidney Winter noted “this book delivers a major blow
to that battered but hitherto unshaken intellectual construct, the theory of the profit-maximizing
firm. Its importance derives from the fact that it presents a well-elaborated alternative theory
4 M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6

that stands up well under the tests of both systematic and causal empiricism, rather than from
any novelty in the criticisms it levels against orthodoxy. . . Those who have not heard the distant
rumblings of the ‘behavioral revolution’ will be surprised at the momentum it has achieved. The
final verdict cannot be predicted, but this book should at least convince most economists that the
revolutionaries bear watching” (148).
Richard Day added, “It is inevitable that economic theory, when used to explain and predict the
activities of real going concerns in agriculture and industry, should undergo a radical reorientation.
From a concern with the substance of production and rational choice, emphasis has shifted to
processes of production and decision-making. . . . The authors provide a convincing argument for
giving organizational structure and behavior a prominent place in the theory of the firm. . . . the
book should be read by every serious student of microeconomics” (462).
This special issue can be interpreted as one kind of confirmation of those elements of optimism.
A Behavioral Theory of the Firm has accumulated the conventional citation accouterments of
impact, has been re-issued as a second edition (Cyert and March, 1992), and continues to have
a reputation as an enduring “classic.” Despite its focus on the firm, the book has had influence
outside of economics (Allison, 1971; Carter, 1971; March and Shapira, 1982; Olsen, 2007). Its
major impact has, however, been on studies of management and organization (Engwall and Danell,
2002; Argote and Greve, 2007).
The story within mainstream economics has been less straightforward. As long as the primary
focus of the theory of the firm was on the aggregate outcomes of interaction among rational actors,
the book’s role in economics was limited. As Cyert and March noted, “Ultimately, a new theory
of firm decision making behavior might be used as a basis for a theory of markets, but at least
in the short run we should distinguish between a theory of microbehavior, on the one hand, and
the micro-assumptions appropriate to a theory of aggregate economic behavior on the other. In
the present volume we will argue that we have developed the rudiments of a reasonable theory of
firm decision making” (1963, 16).
As interest in economics moved slowly toward greater concern with behavioral micro-
assumptions, ideas consistent with Cyert and March (1963) became more prominent (Kay, 1979;
Day and Sunder, 1996; Day, 2002), although with hesitations and qualifications (Baumol and
Stewart, 1971; Williamson and Winter, 1991). Elements of a behavioral view of the firm can now
be found in many modern developments in economics, but especially in transaction cost eco-
nomics (Williamson, 1996, 2002), evolutionary theory (Nelson and Winter, 1982, 2002; Winter,
1986; Dosi, 2004), and organizational economics (Gibbons, 2003). Behavioral ideas have been
elaborated not only in theories of the firm but also in collateral areas of economics, such as strate-
gic management (Rumelt et al., 1991), organization theory (Argote and Greve, 2007), and the
psychological foundations of economic choice (Tversky and Kahneman, 1974; Kahneman and
Tversky, 1979; Camerer et al., 2004). Ideas of bounded rationality, conflict, learning, and routines
are now commonplace, as is the general idea that economic behavior is guided by principles of
human behavior. Although those ideas have many ancestors, A Behavioral Theory of the Firm
probably contributed some modest amount of DNA.
The early reviewers, writing in 1964, did not entirely foretell the future. They did not anticipate
the steadfast retention of neoclassical commitments to unbounded rationality and unrealistic
conceptions of the firm, nor did they foretell the detailed directions that ideas from A Behavioral
Theory of the Firm might take in economics, as evidenced by the papers in this issue. The historical
meanders are reminders, if any are needed, of the limits of futurology, and we have no illusions
in that respect. The future of some variety of behavioral economics seems assured, but its precise
directions seem murky, encompassing as they do everything from neuroscience to evolutionary
 M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6 5

biology, cognitive psychology, finance, demography, and linguistics. It seems likely that Cyert
and March had only the foggiest idea of where the ideas would wander in 50 years. Modern
contributors are probably no better equipped to look 50 years ahead. The wanderers are vigorous;
but the terrain is unknown and shifting, and the fog has not lifted.

Acknowledgements

The work has been supported by a grant from the Cynthia and John Reed Foundation. We
are grateful for the help and contributions of the editors, Richard Day and Barkley Rosser, the
managing editor, Debra Dove, and the authors of the papers published here. Since its initial
appearance in 1980, this journal has been one of the more important places for the propagation
of behavioral ideas into economics. This sustained commitment reflects the admirable tenacity
and imagination of the journal’s editors, for which the field of economics may appropriately be
grateful.

References

Allison, G., 1971. Essence of Decision: Explaining the Cuban Missile Crisis. Little Brown, Boston, MA.
Argote, L., Greve, H., 2007. A behavioral theory of the firm—40 years and counting: introduction and impact. Organization
Science 18, 337–349.
Baumol, W.J., 1959. Business Behavior, Value and Growth. McMillan, New York, NY.
Baumol, W.J., 1962. The theory of expansion of firms. American Economic Review 52, 1078–1087.
Baumol, W.J., Stewart, M., 1971. On the behavioral theory of the firm. In: Marris, R., Wood, A. (Eds.), The Corporate
Economy. Growth, Competition and Innovation Power. Macmillan, London, UK, pp. 118–143.
Boulding, K.E., 1964. Book review: a behavioral theory of the firm. American Journal of Sociology 29, 592–593.
Camerer, C.F., Lowenstein, G., Rabin, M. (Eds.), 2004. Advances in Behavioral Economics. Princeton University Press,
Princeton, NJ.
Carter, E.E., 1971. The behavioral theory of the firm and top level decisions. Administrative Science Quarterly 16,
413–428.
Cooper, W.W., 2004. Memorial to Herbert A. Simon. In: Augier, M., March, J.G. (Eds.), Models of a Man: Essays in
Memory of Herbert A. Simon. MIT Press, Cambridge, MA, pp. 67–74.
Cyert, R.M., March, J.G., 1955. Organizational structure and pricing behavior in an oligopolistic market. American
Economic Review 45, l29–l39.
Cyert, R.M., March, J.G., 1956. Organizational factors in the theory of oligopoly. Quarterly Journal of Economics 70,
44–64.
Cyert, R.M., March, J.G., 1959a. Reply. Quarterly Journal of Economics 73, 684–685.
Cyert, R.M., March, J.G., 1959b. A behavioral theory of organizational objectives. In: Haire, Mason (Eds.), Modern
Organization Theory. Wiley, New York, NY, pp. 76–90.
Cyert, R.M., March, J.G., 1963. A Behavioral Theory of the Firm. Prentice Hall, Endlewood Cliffs, NJ.
Cyert, R.M., March, J.G., 1992. A Behavioral Theory of the Firm, 2nd ed. Blackwell, Oxford, UK.
Cyert, R.M., Dill, W.R., March, J.G., 1958a. The role of expectations in business decision-making. Administrative Science
Quarterly 3, 309–340.
Cyert, R.M., Feigenbaum, E.A., March, J.G., 1958b. Models in a behavioral theory of the firm. Behavioral Science 4,
8l–95.
Cyert, R.M., March, J.G., Starbuck, W., 1961. Two experiments on organizational estimation under conflict of interest.
Management Science 7, 254–264.
Day, R.H., 1964. Review of ‘A Behavioral Theory of the Firm’. Econometrica 32, 461–465.
Day, R.H., 2002. Adapting, learning, economizing and economic evolution. In: Augier, M., March, J.G. (Eds.), The
Economics of Choice, Change and Organization: Essays in Honor of Richard M. Cyert. Edward Elgar, Cheltenham,
UK, pp. 219–236.
Day, R.H., Sunder, S., 1996. Ideas and work of Richard M. Cyert. Journal of Economic Behavior and Organization 31,
139–148.
6 M. Augier, J.G. March / J. of Economic Behavior & Org. 66 (2008) 1–6

Dosi, G., 2004. A very reasonable objective still beyond our reach: economics as an empirically disciplined social science.
In: Augier, M., March, J.G. (Eds.), Models of a Man: Essays in Memory of Herbert A. Simon. MIT Press, Cambridge,
MA.
Engwall, L., Danell, R., 2002. The behavioral theory of the firm in action. In: Augier, M., March, J.G. (Eds.), The
Economics of Choice, Change and Organization: Essays in Memory of Richard M. Cyert. Edward Elgar, Cheltenham,
UK, pp. 27–47.
Feigenbaum, E.A., March, J.G., 1960. Latent motives, group discussion, and the ’quality’ of group decisions in a non-
objective decision problem. Sociometry 23, 50–56.
Gibbons, R., 2003. Team theory, garbage cans, and real organizations. Industrial and Corporate Change 12, 753–787.
Holt, C.C., 2004. Rational forecasting, learning, and decision making. In: Augier, M., March, J.G. (Eds.), Models of a
Man: Essays in Memory of Herbert A. Simon. MIT Press, Cambridge, MA, pp. 355–363.
Kahneman, D., Tversky, A., 1979. Prospect theory: an analysis of decision under risk. Econometrica 47, 263–291.
Kay, N.M., 1979. The Innovating Firm: A Behavioral Theory of Corporate R&D. St. Martin’s Press, New York, NY.
Koopmans, T., 1957. Three Essays on the State of Economic Science. McGraw Hill, New York, NY.
Leslie, S., 1993. The Cold War and American Science. Columbia University Press, New York, NY.
Livesey, F., 1964. Book review: a behavioral theory of the firm: attempts to develop a theory of the firm which is based
on empirical studies of decision-making within the firm. Economic Journal 74, 200–202.
March, J.G., 1962. The business firm as a political coalition. Journal of Politics 24, 662–678.
March, J.G., 2007. Scholarship, scholarly institutions, and scholarly communities. Organization Science 18, 537–542.
March, J.G., Shapira, Z., 1982. Behavioral decision theory and organizational decision theory. In: Ungson, G., Braunstein,
D. (Eds.), Decision Making: An Interdisciplinary Inquiry. Kent Publishing Company, Boston, MA, pp. 92–115.
March, J.G., Simon, H.A., 1958. Organizations. Wiley, New York, NY.
Marris, R., 1964. Economic Theory and ‘Managerial’ Capitalism. Free Press, New York, NY.
Marschak, J., Radner, R., 1972. The Economic Theory of Teams. Yale University Press, New Haven, CT.
Modigliani, F., 2001. Adventures of an Economist. Texere, New York, NY.
Nelson, R., Winter, S., 1982. An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge, MA.
Nelson, R., Winter, S., 2002. Evolutionary theorizing in economics. Journal of Economic Literature 16, 23–46.
Olsen, J.P., 2007. Europe in Search of Political Order: An Institutional Perspective on Unity/Diversity, Citizens/Their
Helpers, Democratic Design/Historical Drift and the Co-existence of Orders. Oxford University Press, Oxford, UK.
Rumelt, R., Schendel, D., Teece, D., 1991. Strategic management and economics. Strategic Management Journal 12,
5–29.
Simon, H.A., 1955. A behavioral model of rational choice. Quarterly Journal of Economics 69, 99–118.
Simon, H.A., 1956. Rational choice and the structure of the environment. Psychological Review 63, 129–138.
Simon, H.A., 1991. Models of My Life. MIT Press, Cambridge, MA.
Tversky, A., Kahneman, D., 1974. Judgment under uncertainty: heuristics and biases. Science 185, 1124–1131.
Williamson, O.E., 1996. Transaction cost economics and the Carnegie connection. Journal of Economic Behavior and
Organization 31, 149–155.
Williamson, O.E., 2002. Empirical microeconomics: another perspective. In: Augier, M., March, J.G. (Eds.), The Eco-
nomics of Choice, Change and Organization: Essays in Honor of Richard M. Cyert. Edward Elgar, Cheltenham, UK,
pp. 419–441.
Williamson, O.E., Winter, S. (Eds.), 1991. The Nature of the Firm: Origins, Evolution, and Development. Oxford University
Press, Oxford, UK.
Winter, S.G., 1964. Review of ‘A Behavioral Theory of the Firm’. American Economic Review 54, 144–148.
Winter, S.G., 1986. The research program of the behavioral theory of the firm: orthodox critique and evolutionary per-
spective. In: Gilad, B., Kaish, S. (Eds.), Handbook of Behavioral Economics, vol. I. JAI Press, Greenwich, CT, pp.
151–187.
Zachary, R., 1999. The Endless Frontier. MIT Press, Cambridge, MA.