A Behavioral Model of Cost Reduction
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Abstract
Three aspects of bounded rationality seem important for decision theory: (1) the existence of goals, (2) the search for improvement, and (3) long-run success. Two important criteria of long-run success are (a) the probability of survival, and (b) the long-run average rate of growth of performance (relative to one or more goals). One obstacle to the development of mathematical theories of resource allocation based on bounded rationality has been the absence of a clear and precise formulation of what is meant by satisficing. In this paper I develop a few related mathematical models of satisficing in an uncertain environment, and apply them to the analysis of cost-reduction and technical change. An additional theme is that the allocation of resources in an organization is significantly influenced by the allocation of decision-making effort.