Herbert Simon (1916-2001)
There are many that claim that Herbert A. Simon has precipitated something like a revolution in microeconomics. This revolution is in the concept of ‘decision-making’ in organisations and under uncertainty, which he claims is far away from the ‘rational man’ often assumed in mainstream microeconomics. He is certainly not the first one to come up with this critique, but he is by far the best known in this regard – and won a Nobel Memorial prize for it in 1978.
Simon started his economic life at the Cowles Commission and thus his first few contributions were in that vein. Of notable importance was his 1949 article unveiling the ‘Hawkins-Simon’ conditions for non- negative square matrices.
Simon subsequently began working on industrial organisation and, among the various things he found, was that both the internal organisation of firms and the external business decisions of firms seems to conform poorly with the neo-classical theories of ‘rational’ decision-making. In an avalanche of articles and books since the 1950s, Simon has focused much of his attention on the issue of decision-making – and has come up with a behavioral theory based on bounded rationality. Agents, he claims, face uncertainty about the future and costs in acquiring information in the present. These two factors, thus, limit the extent to which agents can make a fully rational decision. Thus, Simon claims, they have only bounded rationality and are forced to make decisions not by ‘maximisation’ by satisficing, i.e. setting an aspiration level which, if achieved, they will be happy enough with, and if they don’t, try to change either their aspiration level or their decision. These ‘rules of thumb’ are the utmost agents can achieve in the ‘bounded’ and uncertain real world.
Simon has backed up much of his work with numerous studies on decision-making in business enterprise. Out of this, the ‘new’ theory of the firm as a satisficing as opposed to ‘maximizing’ agent has begun to take hold in industrial organisation. In general, Herbert Simon’s theories of bounded rationality have become an integral part of the so-called ‘New Institutionalist Economics’.
Satisficing or maximising model
It is argued that the concept of organisations taking a satisficing approach to decision making rather than maximising applies to large organisations and is unlikely to apply to small and medium sized businesses where the business operator is often the business owner.
Another aspect to this is where the organisation is driven by aspiration and the objective to ‘do good’ and provide their service in a way that improves society and helps their fellow man. This can be the case with for example an organisation that provides debt advice and the provision of service has an altruistic aspect to it.
Larger organisations with multiple tier management structures therefore are more likely to follow the satisficing model.