Simulation, Sensitivity, and Management Decision Rules

Abstract

A WHOLE theory of business organization and communication was made unnecessary by early economists who assumed that businessmen would automatically act to minimize total costs at any level of output. This minimal concept provided later theorists with the means to build up an elaborate theory of marginal analysis upon the implicit assumption that managers know how to, and can, organize their resources efficiently at any reasonable level of output in both the long and the short run. Little attention has been paid to problems of optimal company organization in ways that take into account factor interdependence, immeasurability, incompleteness, and ineffectiveness of practical working rules, imperfect co-ordination, and so on. Here an attempt will be made to show how the uncritical use of some well-accepted management decision rules derived from economic analyses may lead to incorrect and costly actions. Practical examples will be used to show how under certain conditions the models of behavior and rough estimates of pertinent parameters can lead to suggestions that relate to the question of when to spend time and money collecting and interpreting business information.