ACCY 302 (Krische)
Fall 2006 — Class 01
Notes for the Additional Study Questions:
Predicting behavior—The nature of man
1. What does the acronym REMM stand for?
Resourceful, Evaluative, Maximizing Model
2. What kind of behavior and thinking is assumed by REMM? In other words, what are the
“REMM postulates”?
The REMM postulates are as follows:
• People are resourceful: We are creative, and respond to changes in their environment as
new opportunities
• People are evaluative: We care (receive value) from almost everything.
o People have preferences
o People make trade-offs and substitutions
o Peoples’ preferences are transitive (that is, if A is preferred to B, and B is preferred
to C, then A is preferred to C)
• People are maximizing: We seek the highest level of value possible, given our
constraints
• Wants are unlimited: We always prefer more to less, and our wants are insatiable. (This
explains why we maximize.)
As a result, our behavior is (at least generally) predictable and is realistic for our
circumstances.
3. What are the four alternate models for predicting behavior discussed by Jensen & Meckling?
For each model, identify:
• another name for the model
• at least one point in favor of applying the model for predicting behavior
• at least one point against the applying the model for predicting behavior
Economic model
• Also called: Money maximizer model
• Good:
Forerunner to REMM (maintains similar structure)
• Bad:
Focuses only on $ whereas people are motivated by many other things
Sociological model
• Also called: Social victim model
• Good:
Recognizes “cost” (disincentive) of violating social norms
Page 1 of 3
ACCY 302 (Krische)
• Bad:
Fall 2006 — Class 01
Behavior is predetermined by culture. There is no capacity for change or
evolution.
Psychological model
• Also called: Hierarchy of needs model (Maslow)
• Good:
Demand for different types of goods varies with income level (i.e.,
preferences do have certain regularities)
• Bad:
Does not allow for substitutions or trade-offs. Requires that all of a
person’s physiological needs—food, water—be completely filled before
that person would create any demand for higher needs—safety, love, selfactualization—can arise.
Political model
• Also called:
• Good:
• Bad:
Perfect agent model
Recognizes that people can be altruistic
People also have their own preferences.
4. The hotels in Rio de Janeiro commonly contain signs warning guests against taking valuables
to the beach in order to avoid confrontation with and robbery by local residents. How would
someone who uses the Sociological Model of man explain this criminal behavior? How
would someone who uses the Psychological Model of man explain this criminal behavior?
Explain.
Sociological: Behavior is predetermined by society. Rio must have criminal social norm.
Psychological: Behavior is based on hierarchy of needs. Rio must have low level of income,
such that locals must achieve or maintain lower levels of hierarchy (e.g., money for food),
not higher levels which would include concept of fairness/justice.
Note: Must explain existence of criminal behavior, not how to reduce criminal behavior.
5. Why is the principle of substitution important in predicting human behavior?
Without substitution, there are no real decisions to make. People would merely respond to
“needs”, “cultural backgrounds”, or “do as they are told”. Alternatively, they may like only
one thing – money, so no evaluation is possible or required. Substitution allows decision
makers to evaluate potential outcomes and made decisions to maximize their own well being
by trading off costs and benefits of decision alternatives. Predictable decision makers are
rational, evaluative maximizers. This predictability enables agency problems to be solved
using contracts, organization structure and monitoring.
Page 2 of 3
ACCY 302 (Krische)
Fall 2006 — Class 01
6. Under the Sociological Model, do people respond to incentives generated by rewards and
punishments? Explain.
No, they respond only to what they have learned as a part of their culture – and that is
assumed not to change as a result of rational thought.
7. Why is the Economic Model a poor description of human behavior?
The economic model posits a decision maker who likes only one thing, money. Thus,
evaluation and substitution are impossible and unnecessary. The result is an unrealistic
model that does not reflect the real world.
8. Name and describe four types of management control systems.
See overheads.
Page 3 of 3