Behavioral models as theoretical frames to analyze the business objective

Abstract

This paper examines Pfeffer’s Models of Behavior and connects each of them with attributes of the definition of the firm’s objective, assumed as the maximization of the sustainable, long term valor of the residual claims.

Each of the five models of behavior (rational, social, moral, retrospective and cognitive) contributes to the decision making and goal setting processes with its particular and complementary elements. From those assuming complete rationality and frictionless markets, to the models emphasizing the role of ethical positions, and the presence of perceptive and cognitive mechanisms.

 The analysis highlights the main contributions of critical theories and models of behavior, underlining their focus on non-traditional variables, regarded as critical inputs for goal setting processes and designing alternative executive incentive schemes.  The explicit consideration of those variables does not indicate the need for a new definition of corporate objective. The maximization of the long term value of the shareholders’ claims still defines the relevant objective function of the firm, remaining as the main yardstick of corporate performance.

Behavioral models are recognized as important tools to help managers direct their attention to long term strategies. In the last part, we comment on the relationship between the objective function and behavioral models, from the practitioners’ perspective.