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Edited by Michael Dietrich and Jackie Krafft
Chapter 10: Behavioural Theory
Peter E. Earl 10.1 INTRODUCTION Proponents of the behavioural approaches to the firm believe it may be unwise to begin theorizing about firms from the comfort of one’s armchair with analytically convenient assumptions. Rather, one should first try to acquire knowledge about the behaviour of actual firms and human decision-makers in general. This research strategy has a long history. Over a century ago, Marshall’s evolutionary view of the firm reflected his considerable knowledge of actual firms, while early work on mark-up pricing by Hall and Hitch (1939) was based on interview/questionnaire data. However, what emerged as the behavioural theory of the firm during the 1950s and 1960s via the work of Herbert Simon, Richard Cyert and James March and their colleagues at the Carnegie Institute of Technology in Pittsburgh (later Carnegie-Mellon University) reflected not just knowledge about firms but also insights from psychology, sociology and organizational science. The key contribution is Cyert and March’s (1963) book A Behavioral Theory of the Firm. This not only offered a view of the firm that was radically innovative in analytical terms but it looked unlike any previous economics book since it was replete with complex decision-tree diagrams and masses of computer program code. Cyert and March’s book broke new ground by focusing on the firm as an organization of diverse interest groups trying to cope with the complex challenges arising from external forces and internal politics. It portrays the firm’s behaviour as being both driven by expectations and shaped by its past. It...
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