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MGMT 701a
Seminar in Accounting Research
Book 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 processes1. 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”,
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.
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Book Review 1
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-maximizing choice. 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-discipline science involving economics,
politics, law, psychology and sociology, but I don’t see how the much-psychologicallyoriented 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 incomplete2 (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
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
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Seminar in Accounting Research
Book Review 1
much of the information and many of the assumptions, goals, and attitudes that enter into
his decision, and also provides 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 people expect you to think is more
crucial than in a competitive game. Strategically, communication can help to attain such
lower-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 communication within an organization as 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, so the 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
decision-making position is also the member who has all information relevant to this decision making, then
organization will break down.
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(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 can align preference, which can induce efficient and 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 explained
identification’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. not
influences the motivations of communication. This leads to some attention to “power”
and “authority”. In Simon’s book, a special form of formal communication can occur
through the channel of “authority”, which “deliberately influence the behavior of group
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Seminar in Accounting Research
Book Review 1
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/why some 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 with the 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 problematic if 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 especially of interest to today’s organization 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.)
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MGMT 701a
Seminar in Accounting Research
Book Review 1
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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