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.