Behavioural Theories of the Firm

Behavioural theories of the firm explain firms as organizations with bounded rationality, routines, and multiple internal objectives rather than as single profit-maximizing calculators.

Behavioural theories of the firm explain firms as organizations made up of managers, workers, and owners with limited information, internal routines, and sometimes conflicting objectives.

What these theories reject

The standard textbook firm is often modeled as if it has one objective, profit maximization, and one coherent decision-maker. Behavioural theories argue that this is often too simple.

Real firms may:

  • satisfice rather than optimize,
  • operate through routines and rules of thumb,
  • have internal conflicts across departments,
  • pursue sales growth, stability, market share, or managerial discretion alongside profit.

Core mechanisms

The classic Cyert-March view treats the firm as a coalition. Decisions depend on aspiration levels, organizational slack, search processes, and negotiated compromises inside the organization.

That changes the model logic:

  • firms may not instantly choose the mathematically optimal action,
  • responses to prices or policy can be slow and path-dependent,
  • organizational structure can matter for market outcomes.

Why economists care

These theories are useful when studying pricing, investment, innovation, and adjustment under uncertainty because they explain why observed firm behavior often looks less precise and less frictionless than standard models predict.

Knowledge Check

### What is the main criticism behavioural theories make of the standard firm model? - [x] That real firms are not always single decision-makers perfectly maximizing profit - [ ] That firms never care about revenue - [ ] That markets do not exist - [ ] That accounting identities are false > **Explanation:** Behavioural theories argue that actual firms are organizations with internal frictions, routines, and multiple objectives. ### What does satisficing mean in this context? - [x] Accepting an outcome that is good enough rather than globally optimal - [ ] Maximizing profit with perfect information - [ ] Refusing all risky projects - [ ] Setting wages by law > **Explanation:** With limited information and limited cognition, firms may settle for acceptable solutions instead of the mathematically best one. ### Why can behavioural theories help explain slow firm adjustment? - [x] Because routines, internal bargaining, and bounded rationality can make decisions gradual - [ ] Because all firms ignore prices permanently - [ ] Because firms never learn - [ ] Because profit stops mattering entirely > **Explanation:** Organizational frictions can delay response even when incentives change.