MGMT 701a Seminar in Accounting ResearchBook Review 1

Review 1

Book Review of Administrative Behavior

Iris Jiang

Herbert Simon’s book, Administrative Behavior, relies on Barnard and advances the science of administration. Simon identified some of the problems in administrative study before 1947 (the year when the book was written): lack of “adequate linguistic and conceptual tools for realistically and significantly describing even a simple administrative organization--- describing it, that is, in a way that will provide the basis for scientific analysis of the effectiveness of its structure and operation”. Simon used Bernard’s earlier work as framework, and developed more relevant concepts and a more precise vocabulary: “ before we can establish any immutable ‘principles’ of administration, we must be able to describe, in words, exactly how an administrative organization looks and exactly how it works… I have attempted to construct a vocabulary which will permit such description.” I consider this as the biggest achievement of the book Administrative Behavior.

Simon remarked that “it is not possible to build an adequate theory of human behavior unless we have an appropriate unit of analysis”. A noticeable character of Simon’s book is that he uses decision premises, instead of the whole decision, as the unit of his analysis. The book shows how organizations can be understood in terms of their decision process, and the analysis of administrative behavior in each chapter can be finalized on decision premises: how behavior is influenced by decision premises, how the premises in turn can be modified by the behavior, and how organization structure (given the organization objectives) can influence the decision premises of individuals within it so that decisions carried out by individuals will be consistent with the organization objectives. For this methodology(using decision premises as the unit of analysis), I’m not sure whether it is the best way to carry out a study on organization, as I think the decision premises and the organization structure are two interactive processes[1]. This approach might hide the ultimate factors behind human decision making, but it is certainly a consistent one in Simon’s approach: as long as the decision maker is “bounded rational”, what else can be a better tool than “decision premises” to analyze the decision-making process, once all relevant economical, law, psychological, and sociological factors are umbrellaed under the term “decision premises”?

In terms of the content for the science of administration, Simon’s book provides numerous and important contributions (for e.g., the psychology of administrative behavior, the role of authority, the criterion of efficiency, loyalties and organization identification, reorganization, etc). Among them, “bounded rationality”, “communication”, and “authority” triggered my interests most.

Simon made it clear from the very beginning of the book that “The central concern of administrative theory is with the boundary between the rational and the nonrational aspects of human social behavior” (xxviii). He defined the principle of bounded rationality as follows: “The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real word”. Thus, he replaced the maximizing goal of choice with the goal of satisficing. This contrasts with our standard economic textbook in which rational economic agents will always be able to make the utility-maximizingchoice. With this view of “satisfice”, the choice problem under bounded rationality need detailed analysis of psychology. This, to some extent,embodies why organization theory is a inter-disciplinescience involving economics, politics, law, psychology and sociology, but I don’t see how the much-psychologically- oriented saticficing approach can be formally modeled by the author. I’m more convinced by another school which interprets “bounded rationality” as meaning that all complex contracts are unavoidably incomplete[2] (this is the perspective taken by transaction cost economist toward “bounded rationality”, and I’ll talk more about this perspective in Review 2).

Simon defines an “organization” as a “complex pattern of communication and relationships in a group of human beings” (such pattern is called by sociologist as “role system”). This pattern is of the flavor of “Nash equilibrium”: it provides each member much of the information and many of the assumptions, goals, and attitudes that enter into his decision, and alsoprovides him a set of stable and comprehensible expectations as to what the other members of the group are doing and how they will react to what he says and does. Such pattern can be changed once beliefs and attitudes are modified by changing the flow of communication. Simon points out that “organization is important…because, by structuring communications, it determines the environment of information in which decisions are taken”. It’s not hard to see the importance of communication to an organization, in which it serves the roles far more than “coordination”. (For the simplest case, when the communication is used to deliberately influence the behavior of group members in desired direction, it involves some measure of authority). The informational or strategic role of communication can never be overemphasized, especially when we take organization as a system of decision-making in a cooperative game, where knowing what other peopleexpect you to think is more crucial than in a competitive game. Strategically, communication can help to attain suchlower-order requirements of common knowledge.

Simon’s analysis on communication (Chapter VIII) is kind of “too simple”. He introduced the nature, functions, and forms of communication, and concluded, “in every case the state of mind of the recipient, his attitudes and motivations, must be the basic factors in determining the design of communication.” But why? And how? Simon didn’t explore further. In our class discussion, we talked about several aspects of communication which are ignored by Simon, for instance, the distortion of information in communication. Here, I’ll add something more.

First, I take communicationwithin an organizationas a game in which informed party move first. After all, it’s the party who possess the information decides whether/what information to communicate with other members of the organization. The purpose of communication is to modify the decision premises of other members of organization, sothe difference between personal goal and “organization goal” (I’ll use the term “organization goal” as in Simon’s book) will induce the informed party to initiate a non-optimal communication. Here, the model of strategic communication (Crawford and Sobel, 1982) fits in quite well. In their model, the better-informed party(S) sends a possibly noisy signal to a receiver (R), who then takes an action that determines the welfare of both. Crawford and Sobel showed the Bayesian Nash equilibrium signaling always takes a strikingly simple form, in which S partitions the support of the (scalar) variable that represents his private information and introduces noise into his signal by reporting, in effect, only which element of the partition his observation actually lies in. Crawford and Sobel also show that R’s equilibrium expected utility rises when agents’ preferences become more similar: since R bases his choice on rational expectations, equilibrium signaling is more informative when agents’ preference are more similar. Adopting this model and some other economic theory, we will see two results which can complement Simon’s analysis: 1) when residual rights are in the hands of some members of the organization but not in the hands of some other members, these other members’ personal objective might not be the same as organization objective, and this will inevitably creates distortion (Simon didn’t explain why personal objective can differ from organization objective); 2), the importance of organization loyalties and identification is that they canalign preference, which can induce efficientand productive communication to increase total utility of the firm. Simon defined “identification” as the “process whereby the individual substitutes organizational objectives for his own aims as the value-indices which determine his organizational decisions”. Simon explainedidentification’s role purely from the psychological view (the psychological environment of decisions) while we can actually argue how identification can make communication more efficient using Crawford and Sobel model.Thus,identification is necessary for an organization both psychologically and economically.

In analysis thus far, I’ve considered communication in a one shot game; however, in practice, communication is a continuous process----- it is a repeated cooperative game. Maybe in such repeated game, the psychological elements will become more important. More analysis is needed here,and is beyond the scope of this review.

In the analysis of communications, I pointed out having residual rights vs. notinfluences the motivations of communication. This leads to some attention to “power” and“authority”. In Simon’s book, a special form of formal communicationcan occur through the channel of “authority”, which “deliberately influence the behavior of group members”. Simon realized there are two aspects of “authority”, and for good reasons (as he stated on page 130), he studied authority mainly from the aspect of “area of acceptance” of the subordinates rather than the “power relations”from the superior. Simon went through topics like distinction between influence and authority, the sanctions and limits of authority, the hierarchy of authority and the use of authority. However, Simon didn’t explain where authority comes from: how/whysome members of the organization hold the position of authority (this is understandable, as Simon didn’t study authority in terms of the sanctions of the superior)? From economics textbook, I know authority can come withthe ownership of an asset(the rights to claim residuals). For e.g., if we view a firm as a set of feasible production plans presided by its owner (“owner” and “manager” are not differentiated here) who buys and sells inputs and outputs in a spot market, we can then imagine that authority over assets can translate into the authority over people: an employee will tend to act in the interest of his boss, since doing so will put him in a better position with his boss later. This is easy to understand particularly when what we talk about are tangible assets (like machines, inventories, location, client lists, etc.). Such ideas can also be generalized to intangible assets such as goodwill. For the argument above, the involvement of some non-human assets are essential. In the absence of non-human assets (for e.g., in an organization where the dominant assets are human capital), I’m not sure what authority or control mean and where they come from, in absence of slavery. This is particularly problematicif we follow Simon’s perspective on authority: why should an employee accept his employer’s influence, when the employer’s profit comes mainly from the employee’s human capital? Such aspect of authority ignored by Simon is especiallyof interest to today’sorganization researchers, as human capital is of great importance to new economy, and so is their control. (Sorry I’m quite loose here:I make no distinction between ownership and control, and for top management, I don’t differentiate their authority with their control power. By “power”, I am talking about the “control over valuable resources over and above that determined through explicit contract in a competitive market”, as in Rajan and Zingales (1998). I’ll go back to these issues in Review 2.)

In conclusion, I think Simon’s book provides a start point for administration science, as he developed a set of concepts and structure to approach and analyze the organization problem. As his book was written half a century ago, his book unavoidably can not serve as a complete handbook to study administrative problems today, and the author obviously sacrificed the “depth” for the “width” of coverage. However, this book well serves the role as a “beginner’s guide” to me. It helped me grasp some basic ideas about administrative, familiarized me with the “working vocabulary” in organization study, and constructed some “blueprint” of the organization theory in my mind. After all, this book better prepared me to learn Professor Sunder’s book “Theory of Accounting and Control”.

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[1]It is like in a Nash Equilibrium, one party’s actions are optimal only when the other party is acting according to the Nash Equilibrium.

[2]Under this thinking, once every contingency can be anticipated and contracted over up front by the agent (this can not be achieved under “bounder rationality”), and the legal system can fully enforce contracts, then organizations no longer need to exist. Simon expressed some similar idea: if each member in the decision-making position is also the member who has all information relevantto this decision making, then organization will break down.