Introduction

Herbert A. Simon was born on 15 June 1916 in Milwaukee, WI, USA. He received his PhD in Political Science from the University of Chicago in 1943, and taught at the Illinois Institute of Technology (1942–1949), before moving to Carnegie Mellon University in 1949, where he stayed until he died on 9 February 2001. Simon received major awards from many scientific communities, including the A.M. Turing Award (in 1975), the National Medal of Science (in 1986), and the Nobel Prize in Economics (in 1978). During his career, Simon also served on the Committee on Science and Public Policy and as a Member of the President’s Science Advisory Committee. He also was very active at the National Academy of Science and was the first social scientist to be elected (before the creation of economics or social science divisions). Through both his intellectual work and his institutional efforts, he and his colleagues helped to make Carnegie Mellon University’s business school a model for the post-war reorganization of business schools in the USA (Augier and March 2011).

Simon made important contributions to economics, psychology, political science, sociology, administrative theory, public administration, organization theory, cognitive science, philosophy, and strategy and management. His best-known books include “Administrative behavior” (1947), “Organizations” (1958, with James G. March), “Sciences of the artificial” (1969), “Human problem solving” (1972, with Allan Newell), and his autobiography, “Models of my life” (1991). Although contributing to many seemingly different domains and traditions, Simon’s main research interest remained the same: understanding human decision-making (Augier 2001; Augier and March 2002). Both his early work (in particular Simon 1947; March and Simon 1958) and his later efforts to move beyond a neoclassical framework of analysis of decision-making had significant impacts on the early developments of the behavioral foundations for strategic management (Bromiley 2004), in addition to the traditions around competencies, capabilities, and resources (Rumelt et al. 1991; Pierce et al. 2002).

Besides past and current uses of Simon’s ideas in the field of strategic management, there are additional under explored ideas around concepts such as organizational identification and loyalty that can add important insights into our understanding of strategic management in organizations today and in the future (Augier and Sarasvarthy 2004). Moreover, his work may also hold considerable promise for future developments in the field of behavioral strategy, reminding us that strategy is not only inherently behavioral (Levinthal 2011; Fang 2013), but also inherently organizational (Augier 2017).

Early Life and Work

Simon spent his early years with his parents and his older brother on the West Side of Milwaukee in a middle-class neighborhood. Attending public schools, Simon at first intended to study biology. However, after he went on a strawberry hunting trip, and discovered that he was colorblind (unable to distinguish the strawberries from the plants), he changed his mind, thinking that color blindness would be too big a handicap in biology. He then thought briefly about studying physics, but he gave up that idea after discovering that there weren’t really any major advances left to be made in physics. “They have all these great laws,” he said in conversation. “Newton had done it, no use messing around with it.” As a result, upon finishing high school in 1933, Simon enrolled instead at the University of Chicago with an interest in making social science more mathematical, and an intention to major in economics. In keeping with his strong wish to be independent, Simon preferred reading on his own instead of taking classes, and refused to take the class in accounting, which was required to graduate in economics. As a result, he majored instead in political science.

Political science was not physics, of course, with all the “great laws.” However, as an empirical science, it encompassed both theory and practice and had to take the data seriously. Furthermore, Simon found that interdisciplinary thinking (in particular the role of psychology in understanding political behavior psychology) appealed to him. The details of Simon’s later work differ, but the underlying ideas, interdisciplinary thinking, and the necessity of bringing together theory and reality remained. Also present from the start was the essential idea of limited rationality, which would stay with Simon as he proceeded to combine his insights into political science and public administration with his work in economics, organization theory, psychology, and artificial intelligence. Limited rationality, of course, is also a central concept and basis for the behavioral foundations of the field of strategic management (Bromiley 2004), and developments that have been central to the field, such as transaction cost economics (Williamson 2004) and evolutionary approaches (Dosi 2004; Winter 2000).

In these early years, Simon was invited by Clarence Ridley to participate as a research assistant in a project for the International City Management Association (Simon 1991, p. 64). Together with Ridley, Simon published the results of this project in several articles and in a book, “Measuring municipal activities” (Ridley and Simon 1938). This resulted in an invitation to join the University of Chicago’s Bureau of Public Administration to study local government. While directing a study on public administration of state relief programs in Berkeley, intended to demonstrate how qualitative empirical research could contribute to understanding and improving municipal government jobs (Simon 1991, p. 82), Simon was also working on an early manuscript of his thesis, which became “Administrative behavior,” in which he proposed to reform administrative theory (Simon 1947). The first working title of “Administrative behavior” was “The logical structure of an administrative science”. Simon had envisioned the book as having a heavy philosophical component; in particular, because he was influenced by Rudolph Carnap. Furthermore, Simon introduced the importance of organizations in individual decision-making, a theme later elaborated on, especially in March and Simon (1958). “Human rationality,” he wrote, “gets its higher goals and integrations from the institutional settings in which it operates and by which it is molded … . [Therefore] … [t]he rational individual is, and must be, an organized and institutionalized individual” (Simon 1947, pp. 101–102). Simon argued that organizations make it possible to make decisions by virtue of the fact that they constrain the set of alternatives to be considered and the considerations that are to be treated as relevant. Organizations can be improved by improving the ways in which those limits are redefined and imposed. Finally, “Administrative behavior” criticized existing administrative theory for being based on “proverbs” (often contradictory, common sense principles); a perspective he wanted to replace with a more empirically oriented investigation of the nature of the decision-making processes in administrative organizations.

“Administrative behavior” was the first publication in which he systematically examined the importance of limits to human rationality. “The dissertation contains both the foundation and much of the superstructure of the theory of bounded rationality that has been my loadstar for nearly fifty years,” he wrote (Simon 1991, p. 86). The core chapters of this book were intended to develop a theory of human decision-making that was broad and realistic enough to accommodate both “those rational aspects of choice that have been the principal concern of economics, and those properties and limitations of the human decision-making mechanisms that have attracted the attention of psychologists and practical decision-makers” (1947, p. xi). Bringing together insights from economics and psychology, Simon laid the foundation for later establishment of behavioral economics and for organization studies and strategic management (Mahoney 2005).

In Simon’s own view, the key significance of his early work was in substituting “economic man” with “administrative man” by bringing insights from psychology to bear in studying decision-making processes (Simon 1947, p. xxxv). While finishing his dissertation, Simon moved to Illinois Tech, in an environment in Chicago where most of his fellow researchers were believers in rational decision-making, but Simon remained a strong advocate of the idea of limited rationality. He began to discuss his views with prominent economists, in particular, those connected to the Cowles Commission, which was a group of mathematically inclined economists doing pioneering work in econometrics, linear and dynamic programming, and decision theory, etc. (Christ 1994; Mirowski 2001). The economists connected to the Cowles Commission included such well-known names as Kenneth Arrow, Jacob Marshak, Tjalling Koopmans, Roy Radner, and Gerard Debreu, and they held regular seminars to discuss their research. Although Simon’s stay in Chicago and interaction with the economists almost made him, in his own words, “a full-time economist” (Simon 1991a, p. 140), he didn’t stop his pursuit of a more realistic and behaviorally sound foundation for decision-making. While in Chicago he met economists who were in fact more open to understanding real world behavior, such as Frank Knight (Augier 2001).

In 1949, Simon moved to Pittsburgh to join the newly established School of Industrial Administration at Carnegie Mellon University, an early engineering school in the process of becoming a business school. Although business schools at that time were not oriented toward research, Simon and his colleagues wanted to be different and for their research to be relevant to business in addition to emphasizing the importance of research and analysis. Early core courses in the program included “quantitative control and business,” taught by Bill Cooper, a sequence of micro- and macroeconomics taught by Lee Bach, and organization theory taught by Simon. As a result of early efforts to build up a research program at Carnegie Mellon, the Graduate School of Industrial Administration was picked by the Ford Foundation as one of the foremost places where behavioral perspectives could be developed, and was the model of research-based business education that became an exemplar for the Gordon–Howell Report (see entry on “Business Schools”). Simon also wrote an important paper on the strategic management of business schools as managing and mixing the sometimes opposing forces that business schools face, having one foot in the academic world and one foot in practice (Simon 1967).

Later Work and Career

Decision-making was also the core of Simon’s later work, and it became the basis of his other contributions to organization theory, economics, psychology, and computer science. Decision-making, as Simon saw it, is purposeful, yet not rational, because rational decision-making would involve a complete specification of all possible outcomes conditional upon possible actions to choose the single alternative action that is best. In challenging neoclassical economics, Simon found that such a complex calculation is not possible. As a result, Simon wanted to replace the assumption in economics of global rationality with an assumption that corresponded more with how humans make decisions, their computational limitations, and how they access information in their current environment (Simon 1955), thereby introducing the ideas of bounded rationality and satisficing. Satisficing is the idea that decision-makers interpret outcomes as either satisfactory or unsatisfactory, with an aspiration level constituting the boundary between the two. Whereas in neoclassical rational choice theory decision-makers would list all possible outcomes evaluated in terms of their expected utilities, and choose the one that is rational and maximizes utility, decision-makers in Simon’s model face only two possible outcomes and look for a satisficing solution, continuing to search only until they have found a solution that is good enough. The idea of bounded rationality and satisficing became important for subsequent developments in economics, organization theory, and strategy (see entry on “Satisficing”).

Underlying these ideas is the emphasis on bounded rationality, bringing a more psychological and realistic assumption to the analysis. As Simon noted early on:

[T]he first principle of bounded rationality is that the intended rationality of an actor requires him to construct a simplified model of the real situation in order to deal with it. He behaves rationally with respect to this model, and such behavior is not even approximately optimal with respect to the real world. To predict his behavior, we must understand the way in which this simplified model is constructed, and its construction will certainly be related to his psychological properties as a perceiving, thinking and learning animal (Simon 1957, p. 199).

Both satisficing and bounded rationality were introduced in 1955, when Herbert Simon published a paper that provided the foundation for a behavioral perspective on human decision-making (see entry on “Bounded Rationality”; see entry on “Satisficing”). The paper replaced the assumption of global rationality with another approach, corresponding with how humans make decisions in the real world, including their computational limitations and how they access information in their environments (1955, p. 99). Simon’s illustration of this, continuing the reasoning he had laid out in “Administrative behavior,” emphasized the view that decisions are reasoned and intentionally rational, but limited in their rationality (Simon 1947). As a result of the lack of computational and informational processing powers, decision-making has to simplify the structure of the decisions (and therefore satisfice), one of the most important lessons of bounded rationality.

A companion paper was “Rational choice and the structure of the environment” (Simon 1956) in which he introduced the idea that the environment influences decision-making as much as information processing abilities do. He examines the influence of the structural environment on the problem of “behaving approximately rationally, or adaptively” in particular environments (1956, p. 130). Simon would later elaborate on these ideas in his book “Sciences of the artificial,” using the famous “ant on the beach” metaphor to illustrate his idea (Simon 1969, pp. 51–53). The ant makes his way from one point to another, using a complex path, the complexity consisting of the patterns of the grains of sand along the way, rather than internal constraints. Simon compares this behavior to human behavior and notes that: “Human beings, viewed as behaving systems, are quite simple. The apparent complexity of our behavior over time is largely a reflection of the complexity of the environment in which we find ourselves” (1969, p. 53). Evolutionary economists have developed and elaborated these (and other) early behavioral ideas, integrating concepts such as bounded and limited rationality and satisficing with concepts and ideas around routines, technological evolution, innovation, and learning (Winter 2000; Dosi 2004; also see entry on “Satisficing”). Further, Simon’s development of an alternative to neoclassical thinking helped to pave the way for the evolutionary and behavioral alternative(s) that were fruitful for strategic management (Teece and Winter 1984).

Another early important paper concerned the nature of the employment relation (Simon 1951). The paper began by emphasizing Simon’s traditional view that models ought to correspond to the empirical realities that are neglected in most economic models of the employment contract (1951, p. 293). He then turns to a concept that was so central in “Administrative behavior,” namely the concept of authority. Central to the employment relation, he argues, is the fact that the employer accepts a certain amount of authority within certain areas or zones of acceptance (p. 294). His model suggests a way of reconciling administrative theory and economics through the economic nature of the employment relation; yet, it is still limited by its “assumption of rational utility-maximization behavior incorporated in it” (p. 305). Mahoney (2005) argues that Simon’s perspective on employment relations may help to create a bridge in the field of strategic management “between economists, with their theories of the firm and of factor allocations, and organization theorists, with their theories of organization – a bridge wide enough to permit some free trade of ideas between two intellectual domains that have been isolated from each other” (p. 41). Robert Gibbons’ work (2003) has used Simon’s ideas on this in (behavioral) organizational economics in ways that are important for the strategy field as well.

Simon also used his emerging behavioral view of decision-making to create a propositional inventory of organization theory together with James March and Harold Guetzkow, which led to the book “Organizations” (March and Simon 1958) (see entry on “March, James G. (Born 1928)”). The book was intended to provide an inventory of knowledge of the (then almost non-existent) field of organization studies, and a more proactive role in defining the field. Results and insights from studies of organizations in political science, sociology, economics, and social psychology were summarized and codified. The book expanded and elaborated on the idea of the significance of organizations as social institutions in society. “The basic features of organization structure and function,” they write, “derive from the characteristics of rational human choice. Because of the limits of human intellectual capacities in comparison with the complexities of the problems that individuals and organizations face, rational behavior calls for simplified models that capture the main feature of a problem without capturing all its complexities” (March and Simon 1958, p. 151). The book is now considered one of the classics and pioneering in organization theory in addition to strategic management (Bromiley 2004; Mahoney 2005).

Although Simon opposed major developments in rational choice economics and developed with a collaborator a behavioral alternative, he found value in the emerging field of operations research. Although Simon’s marriage with operations research was neither entirely happy nor permanent, the fact that operations research was well suited to cross-disciplinary boundaries immediately appealed to him, in addition to its appeal for the use of computers for heuristic programming. Thus, Newell and Simon wrote in 1958: “Even while operations research is solving well-structured problems, fundamental research is dissolving the mystery of how humans solve ill-structured problems. Moreover, we have begun to learn how to use computers to solve these problems, where we do not have systematic and efficient computational algorithms. And we now know, at least in a limited area, not only how to program computers to perform such problem-solving activities successfully; we know also how to program computers to learn to do these things”.

Although most of the techniques used in operations research are techniques of constrained maximization, Simon found that they “formed a natural continuity with my administrative measurement research” (1991a, p. 108). He found artificial intelligence to be the next logical step in operations research, using empirical studies in decision-making in organizations, constructing a mathematical model of the process under study, and then simulating it on a computer (Simon 1969).

Simon’s interest in operations research is also evident in his work on the design of optimal production schedules, something that ultimately led to the book, “Planning production, inventories, and work force.” Although initiated at the Cowles Commission, this work was carried out at Carnegie Mellon University, which provided the context for most of Simon’s academic life. It was also at Carnegie that it became clear that Simon was not “just” another economist. Highly respected amongst most (if not all) distinguished economists of his time (see for instance, Samuelson 2004; Arrow 2004; Radner 2004), Simon himself was much more than an economist. For instance, at Carnegie, he and James March carried out a major work in organization studies. Most importantly, at Carnegie, Simon found both colleagues and an institutional environment that could accommodate and appreciate his broad interests and honor his vision to cross disciplinary boundaries in pursuing this vision. With the emergence of a behavioral science emphasis at Carnegie came many contributions of a cross-disciplinary and interdisciplinary nature. This type of disciplinary boundary crossing that had been if not difficult then different from the mainstream previously, became possible and more widespread with the behavioral research focus that Simon helped to establish at Carnegie. It also paved the way for other interdisciplinary movements that began to sprout, including organization studies and strategic management, both essentially empirically driven in the sense of aiming to try and explain real world decision-making processes in organizations that were not accounted for in traditional theories.

Further Lessons

With the extraordinary broad (and deep) scope of Simon’s interests and contributions, it is perhaps no surprise that there is still plenty of room for strategic management to learn from his ideas. In addition to the more established lessons that have already been incorporated into the field (such as bounded rationality and the importance of organizational routines for strategy), as well as more recent and specialized topical “Simonian” applications, there are also other under-utilized ideas with the potential for strategic management.

For example, Simon’s work and ideas on altruism, docility, and organizational identification/loyalty could be further developed and help to broaden the behavioral and motivational foundations of strategic management (Augier and Sarasvarthy 2004; Augier and Teece 2006). Simon’s belief was that opportunism is not the only (or even the dominant) motivator of many people in organizations (Augier and March 2001, 2008). A broader perspective on motivational assumptions can help to explain the importance of issues such as trust and other aspects of organizational behavior. Simon (1991b, and 1993b) argued that people are not always driven by self-interest and opportunism (nor are they altruistic all the time), and individual docility may be reinforced by group/organizational loyalty, a source of which is organizational identification in business firms. As Simon notes:

“At the social level, the gradual change and selection of culture traits are producing patterns of information, advice, and resulting behavior that enhance the average fitness of members of the society; and because of docility, social evolution often induces altruistic behavior in individuals that has net advantage for average fitness in the society. Altruism includes influencing others to behave altruistically. (Simon 1993b, p. 157)

Simon also notes that many theories ignore this organizational identification as a “powerful altruistic force,” which helps to shape and condition “both participants’ goals and the cognitive models they form of their situation” (Ibid.). In other words, docility and organizational identification and altruism can help to improve coordination in organizations and orientation toward common goals, not through incentives, but through broader motivational and behavioral mechanisms.

Simon’s work has also been indicated to be relevant to the recent work around behavioral strategy (Augier 2017). The field of behavioral strategy has lately become successful as a scholarly framework (in particular within the strategic management literature), a framework that can also serve as an important lens for understanding and addressing management issues such as biases. Behavioral strategy as an academic field is more recent than its practice, just as the fields of organizations and management existed as practices well before scholarly studies emerged. Indeed, it has been argued that “strategy” as a practice is inherently “behavioral” (Fang 2013; Levinthal 2011). In addition, strategy (and strategic management) is also inherently organizational; the strategic management of business firms and other organizations constitutes the art and science of creating and sustaining competitive advantages in a world of competing organizations.

Behavioral organization studies and strategy hold valuable lessons for practicing managers on several fronts. For instance, it views the organization as being shaped by its own history (in addition to the interaction with others), but not entirely so, as there is room to proactively shape the strategic environment and one’s performance in it. Behavioral strategy also provides important tools for implementing behavioral insights in practice (Lovallo and Siobony 2010). For example, understanding organizational behaviors and decision biases are central to making strategic decisions in a proactive way and shaping outcomes without being trapped by biases and earlier decisions (including investment decisions). Also, (strategic) managers must be able to successfully identify strategic asymmetries in the competitive environment, and translate them into the building and sustaining of competitive advantages (preferably in a sustainable way). Moreover, managers must be able to embrace essential and unavoidable uncertainties in the competitive battlefield – while skillfully adapting their own organizations (with the inertias and competency traps that entails). In other words, strategic management and leadership of organizations is not easy, but behavioral organizational strategy as a framework has valuable tools for understanding the strategic environment; for understanding individual and organizational traps and biases; for understanding strategic asymmetries that can be useful in building organizational capabilities and competitive advantages; and for adapting and implementing the steps as part of the process of organizational adaptation.

Conclusion

During his amazingly productive life, Simon worked on many different things; yet, he really pursued only one vision (Augier and March 2008; Augier 2001). He contributed significantly to many different disciplines and interdisciplinary developments (including strategic management and organization studies); yet, he found the boundaries between disciplines themselves to be less important, even unimportant, vis-à-vis solving the questions he was working on. Even as Simon sought to develop the idea that the psychological process of thinking could be simulated, in particular in the later decades, he tied his interest in economics and decision-making closely to computer science and psychology. He used computer science to model human problem-solving in a way that was consistent with his approach to rationality. He implemented his early ideas of bounded rationality and means–ends analysis into the heart of his work on artificial intelligence.

Simon’s work has contributed significantly to the intellectual development of the field of strategic management in addition to many of the modern perspectives, and scholars continue to find inspiration in his work with regard to developing the field. His work is also a focal point where several different tribes in the strategy field may find opportunities for collaboration, and help to shape the future of the field.

Cross-References