Organizational Decisions in the Lab

The eleventh in a series of excerpts from Minds, Models and Milieux: Commemorating the Centennial of the Birth of Herbert Simon.

Massimo Egidi

“Bounded Rationality” is a label that gathers the most important advancements of Herbert Simon’s scientific production. His fundamental contributions to cognitive psychology and to the theory of problem solving were developed jointly, each being nurtured by the discoveries emanating from the other discipline. I will briefly review some steps on the path to the creation of the theory of bounded rationality, in order to introduce to the issue of organizational decision making, and the associated laboratory experiments.

From the very start, Simon built the idea of bounded rationality on close observation of the behavior of employees and managers in large organizations. In Administrative Behavior, published in 1947, he came to the realization that organization’s internal mechanisms, insofar as they are characterized by division of labour and cooperation, are the product of a complex activity of goal achieving. Important progresses in this direction were achieved in the fifties, through some empirical analyses of managerial decisions that he conducted at the Graduate School of Industrial Administration of Carnegie Mellon. Among them, of primary interest is the research he conducted jointly with Cyert and Trow in which they realize that beyond the routine decisions, managers make non-repetitive decisions that require solving problems in ill-defined conditions. (Cyert, Simon and Trow, 1956, p. 238)

The field analysis of problem solving sowed the seeds of theory of bounded rationality. In Organizations (1958) March and Simon moved forward from the notion of problem solving as individual activity to the notion of organizational problem solving, with a clear recognition of the evolutionary processes of organizational adaptation and organizational learning within business corporations. The identification of these processes was enhanced by the assumption that the division of labour can be considered a collective problem solving activity. Thus, the development of a deeper theory of problem solving became crucial in explaining human decisions and for the creation of new ideas in theory of organization: in particular the notion of organizational routines within business firms, and of their evolution.

At the time he was finishing his work on Organizations, Simon began his collaboration with Allen Newell. Human Problem Solving, which they published together in 1972, is a bridge between computation, artificial intelligence and cognitive psychology. Here Simon went beyond the notion of “computation” as a human activity that relates means to ends, replacing it with the notion of symbolic manipulation and deepening the various connected mental abilities — memorization, evocation, categorization, abstraction, judgment.