An exploration of some properties of the Price and Output Determination model

The general model presented in this chapter is a summary of our understanding of the key microprocesses in price and output determination by a modern firm. It is a framework for other models and a basis for exploring the reaction of such firms to characteristics of the market, variations in external (e.g., governmental) constraints,

Managerial rationality and profit maximization

As indicated in Chapter 2, the profit maximization hypothesis has been subject to repeated criticism. Some of this criticism has been directed at the notion of marginal analysis itself. We shall not be concerned with this class of criticism. More fundamental, perhaps, have been the criticisms that challenge the propriety of treating profit maximization

Motivating the model of Rational Managerial Behavior

Considerations of space permit only a cursory treatment of the question of managerial motivation. The emphasis, therefore, will be on those aspects of motivation that are neglected by the profit maximization hypothesis, but which are essential to the present model. However, this shift of emphasis should not be construed to mean that such goals

The model of Rational Managerial Behavior

The task now becomes one of selecting a set of variables that permits us to translate management’s objective function into mathematical terms. This requires that two new variables be defined: (1) the fraction of actual profits that is reported and (2) staff. The first of these is necessary in order to identify the management

A particular application of the model of Rational Managerial Behavior

Although a number of possible applications of the model suggest themselves (e.g., in the area of tax policy), most of these are best deferred until the model has been subjected to empirical test. However, departures from profit-maximizing behavior that are said to exist in the operations of public utilities are captured so nicely by

General considerations of Trust Investment Behavior

This study concerns the investment of trust funds held by banks in the United States — funds that currently amount to nearly $60 billion. Our model focuses on the investment of trust funds in common stocks. When making a decision, a trust officer in a bank is confronted with a mass of information. Information

Postulates and data for the model of Trust Investment Behavior

Since our model is a theory of individual decision-making behavior, the method of analysis is based on the theory of human problem solving. 4 In keeping with the postulates of this theory, the main postulates for the analysis of the investment decision process are that there exist: A memory that contains lists of industries

The decision model of Trust Investment Behavior

The investment decision process can be divided into three parts: (1) the analysis and selection of a list of stocks suitable for current investment, (2) the formulation of an investment policy, and (3) the selection of a portfolio (see Fig. 10.1 ). Although the selection process contains rules on diversification and on how to

Testing the model of Trust Investment Behavior

In order to test the model’s ability to reproduce the actual behavior of the trust investor — i.e., to simulate the trust investment process — the model was required to select portfolios for a specific set of actual trust accounts. In particular, the model was required to generate portfolios for four accounts with which

The model of Trust Investment Behavior and the behavioral theory of the firm

A description of an organizational choice process was presented at the end  of Chapter 5. In brief, it assumed multiple, acceptable-level goals, sequential consideration of alternatives with acceptance of the first satisfactory one, and the dominance of the choice process by standard operating procedures and rules of thumb. Patently, a similar choice process is

Descriptive analysis: the firm

The arguments in this volume can be summarized by three statements: (1) The business firm is a relevant unit for investigation. (2) It is possible to construct a theory of decision-making behavior within such a unit. (3) Such a theory must focus explicitly on actual organizational decision process. We have tried both to show

Descriptive analysis: aggregates of firms

It is a common practice in economic theory to make a series of behavioral assumptions for micro-units and to generate from these assumptions a parallel series of implications for aggregations of such units. Assumptions about the  firm, consumer, and investor lead to a series of predictions of the behavior of markets, segments of the

Descriptive analysis: nonbusiness organizations

The business firm is a major decision-making organization. It is not the only type of large, complex organization that makes decisions, however. Even in a society using a market economy, many important decisions are made outside the framework of the firm. Most conspicuous among such institutions are the political institutions of the modern nation

Normative analysis: the firm

The problems of how business firms ought to makedecisions — as contrasted with how they do — form the basis for an extended,growing, and sophisticated literature. Substantial parts of such analyticaltools as modern statistical decision theory, linear, quadratic, dynamic,heuristic, and integer programing, various kinds of direct search methods,game theory, and theory of teams have

Normative analysis: economic policy

Finally, we can consider the implications of thetheory for economic policy. Insofar as economic policy is directed toward influencingthe behavior of business firms, it seems reasonable that a behavioraltheory of the firm might cast some light on policy alternatives. With theappropriate cautions, we think it does. As in the case of other problemsconsidered in

Nature of prediction and explanation

Since we will be using the terms prediction and explanation throughout this paper, it is important to examine in more detail the meaning of these terms in methodology. In closed systems, where the ceteris paribus condition is fulfilled or can be made to hold effectively, explanation and prediction are symmetrical: the model  is explanatory

Prediction in economics

At the heart of the current methodological discussion in the social sciences in general and in economics in particular is (we believe) the predictive weakness of existing theory. The cause of this weakness is the indefinitely large number of variables that can affect the course of economic events. Since predictive models can take into

Nature and use of assumptions

The inability strictly to disconfirm economic laws has raised the issue of the status and the function of assumptions in economic reasoning. Although a history of such propositions as the so-called “rational principle,” or the principle of profit maximization, transcends the scope of this work, it should be noted that these and similar propositions

A positive approach of Prediction and Explanation in Economics

Summing up the argument of the preceding sections, we find that the difficulties encountered in economics flow from the fact that hypotheses cannot be strictly disconfirmed. As long as it is logically impossible to disconfirm a hypothesis, the hypothesis remains in doubt no matter how much confirmatory evidence is accumulated in its support. This

Theory construction (model building)

The professional in any science works within a framework of definitions and concepts that becomes second nature to him. As a result, basic methodological points are frequently taken for granted. In appraising a methodological innovation, however, it is useful to re-examine such points. The explanation and evaluation of computer models can be simplified by