• TABLE OF CONTENTS
HIDE
 Title Page
 Foreword
 Table of Contents
 Objectives
 Introductory discussion
 Problems with which managers must...
 Knowledge situations
 Discussion of knowledge situat...
 Examples of how managerial principles...
 Summary of principles and...
 Summary
 Bibliography






Group Title: Bulletin - Kentucky Agricultural Experiment Station - 593
Title: Decision-making principles in farm management
CITATION PAGE IMAGE ZOOMABLE PAGE TEXT
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00054782/00001
 Material Information
Title: Decision-making principles in farm management
Series Title: Bulletin - Kentucky Agricultural Experiment Station - 593
Physical Description: Book
Language: English
Creator: Johnson, Glenn Leroy
Publisher: Kentucky Agricultural Experiment Station, University of Kentucky
Publication Date: 1953
 Subjects
Subject: Farming   ( lcsh )
Agriculture   ( lcsh )
Farm life   ( lcsh )
 Notes
Funding: Electronic resources created as part of a prototype UF Institutional Repository and Faculty Papers project by the University of Florida.
 Record Information
Bibliographic ID: UF00054782
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 21325532

Table of Contents
    Title Page
        Page 1
        Page 2
    Foreword
        Page 3
    Table of Contents
        Page 4
    Objectives
        Page 5
    Introductory discussion
        Page 5
        Page 6
        Page 7
    Problems with which managers must deal
        Page 8
        Page 9
        Page 10
    Knowledge situations
        Page 11
        Subjective uncertainty
            Page 11
            Page 12
    Discussion of knowledge situations
        Page 13
        Forced-action situtation
            Page 13
        Subjective risk situation
            Page 13
        Subjective certainty - Apparently prefect knowledge
            Page 13
    Examples of how managerial principles are and can be used in handling changes and imperfect knowledge
        Page 14
        Uncertain hog and corn pieces
            Page 14
            Page 15
            Page 16
            Page 17
            Page 18
        Concerning production methods
            Page 19
            Page 20
            Page 21
        Concerning new developments and inventions
            Page 22
            Page 23
            Page 24
            Page 25
            Page 26
        Concerning human behavior and capacities
            Page 27
            Page 28
            Page 29
        Concerning institutions
            Page 30
        Miscellaneous examples
            Page 31
    Summary of principles and generalizations
        Page 32
        Principles and generalizations having to do with learning
            Page 33
        Strategy and generalizations of use in deciding how much chance to take
            Page 34
            Page 35
            Page 36
        Some psycological patterns concerning the value of grains and losses
            Page 37
    Summary
        Page 38
        Page 39
    Bibliography
        Page 40
        Page 41
        Page 42
        Page 43
Full Text

January, 1953


Bulletin 593


So, 0oo0-


Decision-Making Principles


in Farm Management




By Glenn L. Johnson
and Cecil B. Haver


Kentucky Agricultural Experiment Station
University of Kentucky
Lexington


r










(Note: This bulletin was prepared under the sponsorship of the North
Central Farm Management Research Committee but is published by
the University of Kentucky and is not numbered in the regional series.)




NORTH CENTRAL FARM MANAGEMENT
RESEARCH COMMITTEE
Administrative Adviser
CLIFFORD M. HARDIN, Michigan Agricultural Experiment Station
Secretary
JOSEPH ACKERMAN, Farm Foundation, Chicago, Illinois


State Members
Illinois

Indiana
Iowa
Kansas
Kentucky
Michigan
Minnesota
Missouri
Nebraska
North Dakota

Ohio
South Dakota
Wisconsin


P. E. JOHNSTON, University of Illinois,
Chairman
LYNN S. ROBERTSON, Purdue University
EARL O. HEADY, Iowa State College
J. A. HODGES, Kansas State College
GLENN L. JOHNSON, University of Kentucky
KARL VARY, Michigan State College
GEORGE A. POND, University of Minnesota
O. R. JOHNSON, University of Missouri
A .W. EPP, University of Nebraska
CECIL B. HAVER, North Dakota Agricultural
College
(. I. FALCONER, Ohio State University
RUSSELL BERRY, South Dakota State College
P. E. MCNALL, University of Wisconsin


United States Department of Agriculture, Cooperators
Bureau of Agricultural Economics
C. W. CRICKMAN, Washington, D. C.
RUSSELL O. OLSON, Ames, Iowa



While prepared under the sponsorship of the North Central Farm
Management Research Committee, this bulletin is, in part, a contribu-
tion under RMA 42, Kentucky Agricultural Experiment Station, and
also, in part, a contribution under Purnell 142, North Dakota Agri-
cultural Experiment Station. Acknowledgement is extended to the
other members of the Risk and Uncertainty Subcommittee Russell
Berry, Earl O. Heady, and J. A. Hodges, as well as to other members
(particularly Lynn Robertson and 0. R. Johnson) of the over-all
Committee, for. their constructive criticisms. Clifford Hildreth, Uni-
versity of Chicago, and P. J. Thair, Bureau of Agricultural Economics,
also made valuable basic criticisms.












FOREWORD


The manager of a farm, or any business, continuously is forced
to make decisions that affect the welfare of his business. He makes
such decisions with varying degrees of certainty or uncertainty as
to what the outcome will be. In this publication, the authors have
outlined the various situations under which a manager makes de-
cisions, and have developed sets of principles to guide him.
The farmer, student, or teacher who studies this bulletin will
have a greater appreciation of the role of the manager. He will
understand to a greater degree why some people are successful
managers and why some are apparently unsuccessful. Likewise,
he should be able to sharpen his own mental processes and, as a
result, be able to make decisions that are more nearly satisfactory
to him and to his business.
The study that resulted in this bulletin is part of a program of
research developed by the North Central Farm Management Re-
search Committee. It was prepared by Professor Glenn Johnson
of the Kentucky Agricultural Experiment Station, and Professor
Cecil Haver of the North Dakota Agricultural Experiment Sta-
tion, with the advice and counsel of other members of the regional
committee.
Appreciation is due the Kentucky Agricultural Experiment
Station for publishing the bulletin and consenting to make copies
available to other states.
CLIFFORD M. HARDIN
Administrative Advisor














TABLE OF CONTENTS

Page

Objectives .. ........... ....... ...... ................... 5
Introductory Discussion .............................................. ................ 5
Problems With Which Managers Must Deal ...................................... 8
Knowledge Situations ..................................... ............................ 1 1
Subjective Uncertainty ........................................ ..................... 1 1
Subjective Risk Situation .................... ................. ............. 13
Subjective Certainty-Apparently Perfect Knowledge .................. 13
Discussion of the Knowledge Situations ................................................ 13
Examples of How Managerial Principles Are and Can Be Used in
Handling Change and Imperfect Knowledge ............................ 14
Concerning Prices ........................ .. .. .......... .. ............ .. 14
Concerning Production M ethods ................................................. 19
Concerning New Developments and Inventions ........................... 22
Concerning Human Behavior and Capacities ................................ 27
Concerning Institutions ........................... ............................ 30
M miscellaneous Exam ples .................... .................. ....................... 31
Summary of Principles and Generalizations ..................... ................. 32
Principles and Generalizations Having To Do With Learning ......... 33
Strategy and Generalizations of Use in Deciding How Much
C chance to Take .................... ............................................. 34
Some Psychological Patterns Concerning the Value of Gains and
Losses ... ............................... .............. ........................... ... 3 7
Sum m ary ....................... ..................... ..... ... ................. 38










Decision-Making Principles

in Farm Management

By GLENN L. JOHNSON and CECIL B. HAVER1


Objectives
In view of the rapidly developing managerial principles for
handling situations involving change and imperfect knowledge,
the following objectives are sought in this bulletin:
(1) To summarize and bring to the attention of farm managers,
research workers, and extension men some of the decision-
making principles that have been developed.
(2) To discuss and illustrate in a semipopular form the usefulness
of such principles to farmers.
(3) To set up classifications of (a) farm management problems
and (b) degrees of knowledge farmers have about problems.
(4) To provide a bibliography for those interested in delving
further into the logic of the principles presented.

Introductory Discussion
Change Is normal; partial ignorance is universal
The most characteristic aspects of farming operations are (1)
the changes that continually occur, and (2) the lack of knowledge
concerning conditions that affect individual businesses. Prices,
what individual farmers know about production processes, pro-
duction techniques, weather, health, and governmental arrange-
ments change continuously. Instability appears to be more char-
acteristic than stability. Farmers continually try to improve their
knowledge of the conditions that affect their businesses. In fact,
lack of knowledge is as normal as change; partial ignorance is
universal.
Between 1932 and 1948, the over-all index of prices received
1 Glenn L. Johnson, Kentucky Agricultural Experiment Station, and Cecil B.
Haver, North Dakota Agricultural Experiment Station.










Decision-Making Principles

in Farm Management

By GLENN L. JOHNSON and CECIL B. HAVER1


Objectives
In view of the rapidly developing managerial principles for
handling situations involving change and imperfect knowledge,
the following objectives are sought in this bulletin:
(1) To summarize and bring to the attention of farm managers,
research workers, and extension men some of the decision-
making principles that have been developed.
(2) To discuss and illustrate in a semipopular form the usefulness
of such principles to farmers.
(3) To set up classifications of (a) farm management problems
and (b) degrees of knowledge farmers have about problems.
(4) To provide a bibliography for those interested in delving
further into the logic of the principles presented.

Introductory Discussion
Change Is normal; partial ignorance is universal
The most characteristic aspects of farming operations are (1)
the changes that continually occur, and (2) the lack of knowledge
concerning conditions that affect individual businesses. Prices,
what individual farmers know about production processes, pro-
duction techniques, weather, health, and governmental arrange-
ments change continuously. Instability appears to be more char-
acteristic than stability. Farmers continually try to improve their
knowledge of the conditions that affect their businesses. In fact,
lack of knowledge is as normal as change; partial ignorance is
universal.
Between 1932 and 1948, the over-all index of prices received
1 Glenn L. Johnson, Kentucky Agricultural Experiment Station, and Cecil B.
Haver, North Dakota Agricultural Experiment Station.







BULLETIN No. 593


by United States farmers for the items they sell fluctuated between
65 and 285 percent of the level that existed in the 1910-14 period.
For a typical family-operated, grain-roughage-livestock farm in the
Northern Plains, prices received between 1932 and 1945 varied
from 40 to 185 percent of the 1930-44 average. On a typical hog-
dairy farm in western Illinois, a similar index of prices received
ranged from 51 to 182 percent of the same average. Similarly,
prices received on a typical, family-operated dairy farm in southern
Wisconsin varied from 55 to 188 percent of the 1930-44 average.
Changes in the prices of farm products in relation to each
other have been no less important. In 1933, prices for meat ani-
mals were almost twice as high relative to hay and feed grain prices
as in the 1935-39 period. In 1943, prices of oil-bearing crops were
almost three times as high as prices of food grain and more than
twice as high as prices of meat animals in the 1935-39 period. The
importance of such changes in relative prices is readily apparent
to anyone acquainted with farms producing wheat, pork, beef,
soybeans, flax, or corn.
From 1929 to 1949, in the United States as a whole, the yield
of wheat per acre harvested ranged from a low of 11.2 bushels in
1933 to a high of 18.4 bushels in 1947. Similarly, U. S. average
corn yields ranged in 1929-49 from a low of 15.7 bushels per acre
in 1934 to a high of 42.8 in 1948. In milk production, yields are
much more stable. However, from 1930 to 1949, production per
cow for the United States as a whole ranged from a low of 4,000
in 1934 to a high of 5,200 pounds in 1949. These national averages
cover up much of the variation in yield experienced by individual
farmers.
Those familiar with agriculture know of the changes that
continually occur in production techniques. In the last few years,
hybrid corn, new insecticides such as DDT, new herbicides such
as 2-4D, antibiotics, improved roughage-handling equipment, and
many other improvements have come to United States agriculture
and have had their impacts upon individual farm businesses. Farm-
ers are continually improving the degrees of knowledge they pos-
sess concerning production techniques.
Also, in the past few years, widespread changes have occurred
in government programs that affect farmers. Farmers have had
to learn about and to adjust to acreage controls, marketing agree-


[Jan.,







DECISION-MAKING PRINCIPLES


ments, price supports, draft laws, and an altered, heavier structure
of state and federal taxes.
Agriculture in the United States is perhaps the most complex
in the world. It uses complex production techniques in produc-
ing products priced in complex national, international, and local
markets. Further, the people with whom farmers deal present a
wide variety of characteristics due to divergent training, and back-
grounds. Not the least important of the complexities that face our
farmers are the economic, political, and social institutions of the
nation. Consider for a moment the private and public credit in-
stitutions, the impacts of war and wartime economic controls,
marketing arrangements, government price and production-con-
trol programs, tenure arrangements, and the various bodies of
federal, state, and local laws. An individual farmer can hardly
have complete knowledge of these complex conditions affecting
his business.
These changes (and sources of imperfections in knowledge)
merely illustrate the nature of some of the problems faced by
farmers of the United States and, more particularly, of the North
Central Region.

Adjustment to change and improvement in knowledge
is of first importance'
With change and imperfect knowledge2 obviously so important,
farmers must continually learn and adjust.3 As a consequence,
they must spend time learning and making decisions on the basis
of what they learn.4 The essence of management is the process of
learning and adjusting.5

The jobs of management
Managers must observe, analyze, and make decisions. But these
are not the only functions they perform. In addition, they act on
ST. W. Schultz, "Theory of Firm and Farm Management Research," Journal of
Farm Economics, 21:570-86, 1939.
'The terms imperfect knowledge, lack of knowledge, ignorance, and incomplete
information are used synonymously and interchangeably in this bulletin.
SF. H. Knight, Risk, Uncertainty, and Profit, Houghton-Mifflin, New York, 1921.
*A. G. Hart, "Risk, Uncertainty, and Unprofitability of Compounding Proba-
bilities," pp. 110-18 in O. Lange, et al. (ed.) Studies in Mathematical Economics and
Econometrics, University of Chicago Press, Chicago, 1941.
"The adjustment process also extends to one's stock of knowledge: it is often
advisable to discard or to forget past accumulations of knowledge as other types of
knowledge become relatively more important.







BULLETIN No. 593


the basis of their conclusions and accept at least partial individual
economic responsibility for the actions they take.' Farm managers
also perform still other functions, laboring as well as coordinating
and supervising. But the essential difference between performing
these functions, as contrasted with the management functions de-
fined herein, is that the manager performs or has the opportunity
to perform the following five functions:
(1) observation;
(2) analysis;
(3) decision concerning the problems under consideration2;
(4) action-taking3;
(5) acceptance of economic responsibility.

These are the five functions that a manager, operating in the
presence of continuous change, and only partly informed, must
perform if he is to chart successfully the course of his business
over a period of time.


Problems With Which Managers Must Deal

Five broad subject-matter areas (categories) which managers
must study, as a basis for adjustment, can be distinguished. Al-
though these categories do not necessarily cover every kind of
change and imperfection in knowledge that might affect a farm
business, they do cover the important situations with which farm
managers must deal. These five categories are:

(1) price structures and changes;
(2) production methods and responses (including weather effects);
(3) prospective technological developments;
(4) the behavior and capacities of people associated with farm
businesses;

'Of course, people bear all sorts of responsibilities other than economic. The
term economic is relatively broad when interpreted, as it is by the authors, to include
both monetary and subjective values.
2 As distinguished from the series of analytical decisions in the thought processes
leading up to this terminal decision.
3The functions of decision-making and action-taking are closely interrelated.
It can be argued, for instance, that no decision is final until expressed in terms of
an action. It is obvious that a deciding process not terminating in action may lead
to a different decision, this being the basis for including action-taking and accept-
ance of economic responsibility as a job of management.


[Jan.,







DECISION-MAKING PRINCIPLES


(5) the economic, political, and social situations in which a farm
business operates.1

Lack of knowledge concerning price structures
and changes2
A farmer's knowledge is almost always imperfect with respect
to the prices he will receive for the products he produces and the
prices he must pay at future dates for items used in production
and consumption. Economists, farmers, and businessmen all ex-
perience great difficulty in foreseeing long-run changes in the
level of prices. Relationships between prices are usually more
stable and hence somewhat easier to predict than the level of
prices. For instance, the hog-corn ratio or the dairy-feed price
ratio is more easily predicted and handled than are the absolute
levels of hog, corn, milk, and dairy-feed prices.

Imperfections in knowledge concerning production
techniques and production responses3
Farmers are usually interested in learning more about existing
methods of producing a particular product. Frequently their pro-
ductive "know-how" can be changed by learning something about
existing production techniques. Similarly, knowledge about ex-
pected production is never perfect in agriculture; weather and
biological factors such as disease and parasitic infestations often
result in production responses that differ widely from those an-
ticipated by a farmer in planning his production programs.

1 It may be noted (1) that the first two of these subject-matter areas, prices and
production methods, are the traditional fields of interest of farm-management men
and static-production economists, (2) that the third area-technological change-was
a special field of interest of Schumpeter with his interest in innovations, (3) that the
fourth field, human behavior, is roughly the special field of interest of von Neumann
and Morgenstern with their interest in the theory of games and personal strategies,
and (4) that the fifth area, economic, political, and social institutions, is the special
field of interest of the institutional economists.
2D. Gale Johnson, Forward Prices for Agriculture, Chicago: University of Chi-
cago Press, 1947.
W. W. Wilcox, "Effects of Farm Price Changes on Efficiency in Farming," Jour-
nal of Farm Economics, 33:55-65, 1951.
D. B. Williams, "Price Expectations and Reactions to Uncertainty by Farmers
in Illinois," Journal of Farm Economics, 33:20-39, 1951.
SW. E. Hendrix, "Availability of Capital and Production Innovations on Low
Income Farms," Journal of Farm Economics, 33:66-74, 1951.
Emily L. Day and E. L. Barber, Physical Risks in Farm Production- Selected
References, 193048, Library List No. 49, U. S. Dept. of Agriculture Library, August
1949.







BULLETIN NO. 593


Ignorance concerning prospective changes in
technology (production methods)1
An outstanding characteristic of agriculture in the United
States is the rapid rate of progress in production methods. Com-
petition is keen and failure to learn about and adopt production
methods capable of reducing costs is often disastrous to the indi-
vidual. New inventions and developments often render fixed
investments obsolete; thus, managers are generally aware of the
need to "keep up with developments."

Incomplete information concerning behavior and
capacity of people associated with farm businesses2
A manager of a particular farm cannot have perfect knowledge
concerning the personal performance, honesty, and capacity of
himself, the people he hires, the people he does business with, and
the members of his own family. Some farm businesses fail because
a manager or his wife experience break-downs that reduce their
physical and mental capacities. Any community will furnish ex-
amples of farm businesses that have been ruined by failure of
various people to live up to expectations held by managers of the
businesses. Conversely, any community will furnish illustrations
of situations in which better-than-expected performance has re-
sulted in outstanding farming accomplishments.

Lack of knowledge concerning economic, political,
and social settings
Subsidy programs come and go. Tax structures change. Price
controls and price supports are imposed and removed. A large
business concern moves into a rural community and affects the
demand for labor. War alters and changes the supply of and de-
mand for farm products and the factors used in producing them.
Such changes in the economic, political, and social setting have

'Hendrix, op cit.
1J. M. Brewster and H. L. Parsons, "Can Prices Allocate Resources in American
Agriculture?" Journal of Farm Economics, 28:938-60, 1946.
J. D. Black, et al., Farm Management New York: The Macmillan Co., 1949,
pp. 88-102.
J. von Neumann and 0. Morgenstern, Theory of Games and Economic Behavior
Princeton: Princeton University Press, 1944.
J. McDonald. Strategy in Poker, Business and War New York: W. W. Norton
and Company, 1950.


[Jan.,







DECISION-MA.KING PRINCIPLES


heavy impacts on farm businesses that must be studied as a basis
for adjustment.


Knowledge Situations'
The knowledge situations in which farm managers find them-
selves need to be classified as a basis for seeing more clearly how
management handles problems of change and imperfect knowl-
edge. Situations vary from those involving outcomes so imper-
fectly known that no action is willingly taken, to those in which
anticipated outcomes are regarded as perfectly known.
Because managers continually try to add to their knowledge,
it seems desirable to set up a classification of knowledge situations,
with those that involve less perfect degrees of knowledge coming
first and those that involve more perfect degrees following. Of the
five categories to be outlined, three involve subjective uncertainty,
one subjective risk, and one subjective certainty. This classifica-
tion makes it easier to (1) understand the principles to be pre-
sented later and (2) visualize managerial problems.


Subjective Uncertainty

When this imperfect state of knowledge exists, there are three
situations of significance the inactive, learning, and forced-action
situations. Two of these three situations are similar, in that the
manager concerned regards his knowledge of a contemplated busi-
ness (or household) action as inadequate, but willingly takes one
or two alternative actions he decides to learn (acquire additional
information) or, feeling that learning is not worthwhile, (inertia

The classification presented here is not an impromptu one. The writings of
Knight, Hart, Tintner, Wald, Marschak, and others were considered and the system
evolved as one that would be meaningful to farmers, farm managers, and research
or extension men working for and with them. The subjective nature of the classifi-
cation appeared increasingly necessary if realism was to be retained.
F. H. Knight, op cit.
A. G. Hart, op cit., and Anticipations, Uncertainty and Dynamic Planning.
Studies in Business Administration, Vol. XI, No. 1 Chicago: University of Chicago
Press, 1940.
A. Wald, Statistical Decision Functions New York: John Wiley and Sons, Inc..
1950- Sequential Analysis New York: John Wiley and Sons, Inc., 1947.
G. A. Tintner, "A Contribution to the Nonstatic Theory of Production," pp.
92-99 in O. Lange, et al. (ed.), Studies in Mathematical Economics and Econometrics
Chicago: University of Chicago Press, 1941.


1953]







DECISION-MA.KING PRINCIPLES


heavy impacts on farm businesses that must be studied as a basis
for adjustment.


Knowledge Situations'
The knowledge situations in which farm managers find them-
selves need to be classified as a basis for seeing more clearly how
management handles problems of change and imperfect knowl-
edge. Situations vary from those involving outcomes so imper-
fectly known that no action is willingly taken, to those in which
anticipated outcomes are regarded as perfectly known.
Because managers continually try to add to their knowledge,
it seems desirable to set up a classification of knowledge situations,
with those that involve less perfect degrees of knowledge coming
first and those that involve more perfect degrees following. Of the
five categories to be outlined, three involve subjective uncertainty,
one subjective risk, and one subjective certainty. This classifica-
tion makes it easier to (1) understand the principles to be pre-
sented later and (2) visualize managerial problems.


Subjective Uncertainty

When this imperfect state of knowledge exists, there are three
situations of significance the inactive, learning, and forced-action
situations. Two of these three situations are similar, in that the
manager concerned regards his knowledge of a contemplated busi-
ness (or household) action as inadequate, but willingly takes one
or two alternative actions he decides to learn (acquire additional
information) or, feeling that learning is not worthwhile, (inertia

The classification presented here is not an impromptu one. The writings of
Knight, Hart, Tintner, Wald, Marschak, and others were considered and the system
evolved as one that would be meaningful to farmers, farm managers, and research
or extension men working for and with them. The subjective nature of the classifi-
cation appeared increasingly necessary if realism was to be retained.
F. H. Knight, op cit.
A. G. Hart, op cit., and Anticipations, Uncertainty and Dynamic Planning.
Studies in Business Administration, Vol. XI, No. 1 Chicago: University of Chicago
Press, 1940.
A. Wald, Statistical Decision Functions New York: John Wiley and Sons, Inc..
1950- Sequential Analysis New York: John Wiley and Sons, Inc., 1947.
G. A. Tintner, "A Contribution to the Nonstatic Theory of Production," pp.
92-99 in O. Lange, et al. (ed.), Studies in Mathematical Economics and Econometrics
Chicago: University of Chicago Press, 1941.


1953]







BULLETIN No. 593


and ignorance increase the cost of learning) he refuses to act and
to learn. The third situation exists when outside influences force
him to take action even though he feels that his information is
inadequate.

Inactive situation
Often a farm manager knows so little about a contemplated
action that he is unwilling to act and, at the same time, does not
attach enough importance to what he might learn to offset the
cost of learning. Inertia, ignorance, and the desire for leisure
partially explain costs and, hence, partially explain the existence
of this situation. A manager is inactive in the sense that he refuses
to take the contemplated action and refuses to try to learn. Such
managers correctly say, on the basis of their opinions, that "I don't
know enough about it to do anything, and furthermore, it isn't
important enough for me to worry about it." To describe this
situation more formally, the manager does not have enough knowl-
edge to be willing to take a contemplated action and he does not
value prospective improvements in his knowledge enough to cover
the "cost" of making such improvements.

The learning situation
Managers often find themselves in the position of not knowing
enough about a contemplated action to be willing to take the
action but, in contrast to the inactive situation described above,
attach sufficient importance to prospective improvements in their
knowledge to offset the cost of making such improvements. Farm-
ers commonly find themselves in this situation; thus, they are con-
tinually interested in new farm machines, new varieties of crops,
production methods followed by successful farmers, and other
ideas, processes, and enterprises. They attend extension meetings,
county fairs, and implement shows, buy farming magazines, visit
one another, and travel about the country as different ways of ob-
serving and drawing conclusions. A learning situation is one in
which a person's knowledge is not complete enough for him to be
willing to take a contemplated action but in which he values im-
provements in his knowledge more than the cost of making such
improvements.


[]an.,







DECISION-MAKING PRINCIPLES


Forced-action situation
Sometimes farm managers find themselves forced by circum-
stances to take a contemplated action even though they do not
know enough about it to be willing to do so. In some such situa-
tions, if time were available (i.e., if action were not forced) more
information could be acquired at a cost less than its value. One
commonly hears farmers say, "I did not know what to do but I had
to do something." In fact, many farmers in the learning situation
move into the forced-action stage because a decision must be made
and action taken on the basis of incomplete information.1

Subjective Risk Situation
In many instances, a manager does not see the probable results
of a contemplated action perfectly but nevertheless has enough
information (acquired through learning and experience) to decide
whether to act or not to act; further, he is willing to accept the
consequences of the decision and action. In other words, a man-
ager "doesn't know everything about it" but he knows enough
about the possible outcomes to be willing to make the choice and
bear the responsibility. That is, he is "willing to risk it." In such
situations, managers often buy insurance, set up safety margins,
use reserves and discounts, and other formal and informal means
of bearing the risk. Decisions made in the risk situation may in-
clude decisions not to act.

Subjective Certainty Apparently Perfect Knowledge
Managers seldom have perfect knowledge concerning a contem-
plated action but their knowledge often becomes nearly enough
perfect for them to operate as though they had perfect knowledge.
In these situations, managers do not set up safety margins, discount
results, or keep "aces in the hole" in case of trouble. The decision
may be either to act or not to act.

Discussion of the Knowledge Situations
The five definitions presented above are personal, in that they
depend upon the nature of the individual manager under con-
'It could be argued that, conceptually, the forced-action situation is a special
case of the subjective risk situation in which the marginal cost of learning is vertical
due to a special force imposing severe costs for delaying decisions.







DECISION-MAKING PRINCIPLES


Forced-action situation
Sometimes farm managers find themselves forced by circum-
stances to take a contemplated action even though they do not
know enough about it to be willing to do so. In some such situa-
tions, if time were available (i.e., if action were not forced) more
information could be acquired at a cost less than its value. One
commonly hears farmers say, "I did not know what to do but I had
to do something." In fact, many farmers in the learning situation
move into the forced-action stage because a decision must be made
and action taken on the basis of incomplete information.1

Subjective Risk Situation
In many instances, a manager does not see the probable results
of a contemplated action perfectly but nevertheless has enough
information (acquired through learning and experience) to decide
whether to act or not to act; further, he is willing to accept the
consequences of the decision and action. In other words, a man-
ager "doesn't know everything about it" but he knows enough
about the possible outcomes to be willing to make the choice and
bear the responsibility. That is, he is "willing to risk it." In such
situations, managers often buy insurance, set up safety margins,
use reserves and discounts, and other formal and informal means
of bearing the risk. Decisions made in the risk situation may in-
clude decisions not to act.

Subjective Certainty Apparently Perfect Knowledge
Managers seldom have perfect knowledge concerning a contem-
plated action but their knowledge often becomes nearly enough
perfect for them to operate as though they had perfect knowledge.
In these situations, managers do not set up safety margins, discount
results, or keep "aces in the hole" in case of trouble. The decision
may be either to act or not to act.

Discussion of the Knowledge Situations
The five definitions presented above are personal, in that they
depend upon the nature of the individual manager under con-
'It could be argued that, conceptually, the forced-action situation is a special
case of the subjective risk situation in which the marginal cost of learning is vertical
due to a special force imposing severe costs for delaying decisions.







DECISION-MAKING PRINCIPLES


Forced-action situation
Sometimes farm managers find themselves forced by circum-
stances to take a contemplated action even though they do not
know enough about it to be willing to do so. In some such situa-
tions, if time were available (i.e., if action were not forced) more
information could be acquired at a cost less than its value. One
commonly hears farmers say, "I did not know what to do but I had
to do something." In fact, many farmers in the learning situation
move into the forced-action stage because a decision must be made
and action taken on the basis of incomplete information.1

Subjective Risk Situation
In many instances, a manager does not see the probable results
of a contemplated action perfectly but nevertheless has enough
information (acquired through learning and experience) to decide
whether to act or not to act; further, he is willing to accept the
consequences of the decision and action. In other words, a man-
ager "doesn't know everything about it" but he knows enough
about the possible outcomes to be willing to make the choice and
bear the responsibility. That is, he is "willing to risk it." In such
situations, managers often buy insurance, set up safety margins,
use reserves and discounts, and other formal and informal means
of bearing the risk. Decisions made in the risk situation may in-
clude decisions not to act.

Subjective Certainty Apparently Perfect Knowledge
Managers seldom have perfect knowledge concerning a contem-
plated action but their knowledge often becomes nearly enough
perfect for them to operate as though they had perfect knowledge.
In these situations, managers do not set up safety margins, discount
results, or keep "aces in the hole" in case of trouble. The decision
may be either to act or not to act.

Discussion of the Knowledge Situations
The five definitions presented above are personal, in that they
depend upon the nature of the individual manager under con-
'It could be argued that, conceptually, the forced-action situation is a special
case of the subjective risk situation in which the marginal cost of learning is vertical
due to a special force imposing severe costs for delaying decisions.







DECISION-MAKING PRINCIPLES


Forced-action situation
Sometimes farm managers find themselves forced by circum-
stances to take a contemplated action even though they do not
know enough about it to be willing to do so. In some such situa-
tions, if time were available (i.e., if action were not forced) more
information could be acquired at a cost less than its value. One
commonly hears farmers say, "I did not know what to do but I had
to do something." In fact, many farmers in the learning situation
move into the forced-action stage because a decision must be made
and action taken on the basis of incomplete information.1

Subjective Risk Situation
In many instances, a manager does not see the probable results
of a contemplated action perfectly but nevertheless has enough
information (acquired through learning and experience) to decide
whether to act or not to act; further, he is willing to accept the
consequences of the decision and action. In other words, a man-
ager "doesn't know everything about it" but he knows enough
about the possible outcomes to be willing to make the choice and
bear the responsibility. That is, he is "willing to risk it." In such
situations, managers often buy insurance, set up safety margins,
use reserves and discounts, and other formal and informal means
of bearing the risk. Decisions made in the risk situation may in-
clude decisions not to act.

Subjective Certainty Apparently Perfect Knowledge
Managers seldom have perfect knowledge concerning a contem-
plated action but their knowledge often becomes nearly enough
perfect for them to operate as though they had perfect knowledge.
In these situations, managers do not set up safety margins, discount
results, or keep "aces in the hole" in case of trouble. The decision
may be either to act or not to act.

Discussion of the Knowledge Situations
The five definitions presented above are personal, in that they
depend upon the nature of the individual manager under con-
'It could be argued that, conceptually, the forced-action situation is a special
case of the subjective risk situation in which the marginal cost of learning is vertical
due to a special force imposing severe costs for delaying decisions.







BULLETIN No. 593


sideration. A given manager can face all five of the above situa-
tions with respect to five different contemplated actions, and, with
the passage of time, can pass through more than one with respect
to a given action. One manager might decide that a given amount
of information is inadequate for taking a given contemplated ac-
tion; such a situation would be classed as "inactive." A second
manager, possessing the same amount of information, might de-
cide that he knows enough to be willing and able to act, in which
case the situation would be classed as subjective risk.1


Examples of how Managerial Principles Are and Can
Be Used in Handling Change and Imperfect Knowledge

Concerning Prices

Uncertain hog and corn prices
Sometime in the summer, hog producers begin to think about
the number of gilts to be kept for the next year's spring pig crop.
On particular farms this decision is ordinarily affected, among
other things, by prospective prices for hogs, corn, protein supple-
ments; prospective supplies of hogs, corn, and supplements; and
the health of the current drove of hogs. As the feeder hogs on
a particular farm approach market weights, it becomes increasingly
important that a decision be reached as to how many gilts will
be taken off the fattening ration and placed on a ration more
favorable to the development of thrifty breeding animals.
In this period hog producers ordinarily find themselves in a
learning situation; i.e., their knowledge of hog prices, of corn
prices, and of their own supply of corn is not sufficient for them
to decide on the size of their breeding herd, while, at the same
time, they value at more than its cost the additional information
they can acquire. Thus, hog producers spend time evaluating
current trends in prices of hogs and corn. They also begin to make

1 Some economists may object that the classification of the degrees of knowledge
on a subjective basis is not practical. They argue that such a classification is hard
to use as a basis for empirical research. If management is, in fact, a subjective
process, then how can a researcher, confining himself to its objective aspects, fully
study it? Further, is empirical research the only research of value? Further, why
cannot subjective processes be objectively studied? An architect objectively studies
a family's subjective wants and preferences as a basis for designing an objective plan
for satisfying the subjective wants and preferences of the family.


[Jan.,







BULLETIN No. 593


sideration. A given manager can face all five of the above situa-
tions with respect to five different contemplated actions, and, with
the passage of time, can pass through more than one with respect
to a given action. One manager might decide that a given amount
of information is inadequate for taking a given contemplated ac-
tion; such a situation would be classed as "inactive." A second
manager, possessing the same amount of information, might de-
cide that he knows enough to be willing and able to act, in which
case the situation would be classed as subjective risk.1


Examples of how Managerial Principles Are and Can
Be Used in Handling Change and Imperfect Knowledge

Concerning Prices

Uncertain hog and corn prices
Sometime in the summer, hog producers begin to think about
the number of gilts to be kept for the next year's spring pig crop.
On particular farms this decision is ordinarily affected, among
other things, by prospective prices for hogs, corn, protein supple-
ments; prospective supplies of hogs, corn, and supplements; and
the health of the current drove of hogs. As the feeder hogs on
a particular farm approach market weights, it becomes increasingly
important that a decision be reached as to how many gilts will
be taken off the fattening ration and placed on a ration more
favorable to the development of thrifty breeding animals.
In this period hog producers ordinarily find themselves in a
learning situation; i.e., their knowledge of hog prices, of corn
prices, and of their own supply of corn is not sufficient for them
to decide on the size of their breeding herd, while, at the same
time, they value at more than its cost the additional information
they can acquire. Thus, hog producers spend time evaluating
current trends in prices of hogs and corn. They also begin to make

1 Some economists may object that the classification of the degrees of knowledge
on a subjective basis is not practical. They argue that such a classification is hard
to use as a basis for empirical research. If management is, in fact, a subjective
process, then how can a researcher, confining himself to its objective aspects, fully
study it? Further, is empirical research the only research of value? Further, why
cannot subjective processes be objectively studied? An architect objectively studies
a family's subjective wants and preferences as a basis for designing an objective plan
for satisfying the subjective wants and preferences of the family.


[Jan.,






DECISION -NIAKI NG PRINCIPLES


tentative estimates as to the size of their own corn crop and the
amount of it that will be left over to feed the crop of spring pigs
after feeding the desirable quantities to other classes of livestock.
If the day when the gilts must be separated from the market
hogs approaches before the producer acquires enough information
to be ready, willing, and able to act, he may desire to follow a
strategy that will keep him from getting into a forced-action posi-
tion. One way of avoiding the final decision as to size of breeding
herd is to keep a fairly large number of gilts on a tentative basis -
a few extra gilts can be held on a nonfattening ration for a month
or two at a relatively low cost. The costs would include, among
other things, (1) the possible occurrence or effect of a seasonal de-
cline in the per-pound value of the gilts if they are eventually
marketed, and (2) reduced efficiency in their gains when placed
on a breeding-herd ration. Here the problem is to avoid paying
more for additional flexibility (the ability to postpone decisions)
than such additional flexibility is worth. (See the flexibility prin-
ciples, items 2 and 3, page 33.)
If ability to postpone the decision as to size of breeding herd
is acquired, the learning situation is prolonged. Consequently,
more time must be devoted to learning about prospective supplies
of corn, protein supplements, prospective prices of hogs and corn,
and the health of the hogs o'n the farm. However, the date is
eventually approached beyond which breeding for the spring pig
crop can no longer be put off.
If on that date the manager has not accumulated enough in-
formation to be ready to decide on the size of his breeding herd,
he may further postpone the decision by breeding extra gilts and
then keeping them until just before they get so "piggy" as to be
heavily docked on markets for slaughter animals. It is logical for
a manager to follow such procedures provided he values prospec-
tive improvement in his knowledge more than (1) the cost of
providing the flexibility necessary to use such knowledge, plus
(2) the cost of acquiring such knowledge. If at some point in this
process of accumulating information, the farmer acquires enough
information to be willing to make a final choice and accept its
consequences, he finds himself in the subjective risk situation
described earlier.
If a manager has not acquired enough information to be ready







BULLETIN NO. 593


to decide on the size of his breeding herd by the time his gilts
begin to get piggy, he may find himself in a forced-action situation;
i.e., despite the fact that he does not know enough to be willing
to act he may be forced to act.1 There is, of course, the alternative
of disposing of bred gilts, but the decision as to whether to pro-
duce bred gilts or slaughter animals is forced.

Some imperfect knowledge problems in
beef production
The raising and specialized feeding of beef cattle have devel-
oped in varying degrees in all parts of the midwest. Beef feeding,
especially, is generally characterized as a "risky proposition,"
"speculative" or as a "gamble." Farmers have developed various
schemes for circumventing, handling, and reducing such risks and
gambles.
In the central corn belt, risks in beef feeding are reduced by
having a beef herd or a hog enterprise. The former provides a
few feeders at a low out-of-pocket cost that will help the farmer
to make up deficiencies in returns in years when feeding proves
to be unprofitable. A hog enterprise is in part complementary,
but it also provides the farmer with another source of income if
the margins fall into the red in finishing cattle. As the proportion
of hogs is increased relative to beef, the combined enterprises be-
come, jointly, less risky; as the proportion of hogs becomes still
higher the two enterprises may again become more risky. The
amount of such protection needed by the farmer is determined
in part by his financial position and his reaction to risks (see items
8 and 9, page 35 and psychological patterns, page 37). In areas
where hog production is less specialized, particularly in the Great
Plains where production of feed is uncertain, the hog enterprise
itself becomes too risky to be used as an insurance device.
The organizational pattern adopted also depends upon a farm-
er's resources and other enterprises, and upon his knowledge con-
cerning livestock prices, feed supplies, and beef (and hog) produc-
tion "know-how." Thus, where beef herds fit into the farm or-
ganization, the farmer has a number of alternative lines of action.
A basic cow herd may be maintained and feeder calves sold. Such
an organization is rather inflexible if one's pasture becomes short
SIn terms of footnote 1, page 13, the marginal cost of additional information
may become almost vertical at this point.


[Jan.,







DECISION-MAKING PRINCIPLES


or the hay crop fails, for the alternatives are buying high-priced
feed or selling part of the cow herd under disadvantageous condi-
tions. If calf prices become unfavorable, barn space may not be
available to carry the animals over even though this alternative
may be otherwise advisable. When the farmer's facilities are used
to capacity his organization becomes specialized and relatively
inflexible. A second alternative is that of holding over calves and
selling them as yearlings or even two-year-olds. This method is
for the farmer who feels that he cannot foresee the future well
enough to undertake a specialized, relatively unadaptable system,
but who values prospective improvements in his knowledge in
regard to prices and yields more than the cost of acquiring such
improvements and therefore he develops a more flexible organiza-
tion.
In the first alternative, the farmer obtains rapid low-cost live-
weight gains with little ability to adjust to change. The second
allows the farmer to adjust his plans as conditions appear to war-
rant. Under a more flexible plan, steers may be marketed when
there is no economic advantage in keeping them longer, the plan-
ned grazing period can be shortened, winter feeding can be omit-
ted if feed supplies are short, and yet the basic cow herd can be
maintained. The second system is also such that expansion is
relatively easy and capital outlays are not heavy in starting or ex-
panding beef production. Thus the choice between the two sys-
tems depends partly on whether the ability to adjust offsets re-
duced efficiency in securing live-weight gains.'
Dual-purpose cattle are an important enterprise in many areas.
They persist largely because they offer the farmer a chance to
shift between milk, cream, or calf production as price relationships
change. This ability to change (flexibility) has both a value and
a cost, the cost arising from the fact that dual-purpose cattle are
relatively inefficient in production of either beef or milk when
considered singly. Flexibility is often valuable and should be built
into a farm organization to the extent that the value of additional
flexibility to the organization, in the opinion of the operator,
equals or exceeds its costs. (See flexibility principles, items 2 and
3, page 33.)
1Mont Saunderson, "What's Ahead for the Western Cattle Ranch," The Mon-
tana Stockgrower, 23 (No. 5), Sept. 1951.


1953]







BULLETIN No. 593


A number of alternatives face a cattle feeder both before the
feeding operation is started and while it is being carried on. This
is a business fraught with price dangers. Those operators who
feel that these price dangers are too great and who do not value
prospective improvements in knowledge higher than their cost
seek other alternatives. Some feeders vary their production plans,
going from light to heavy cattle, from a straight roughage system
to heavy grain feeding, or from many animals to few or none,
depending upon expected prices and costs. The latter type of
action has earned some operators the somewhat reproachful title
of "in and outers" and others the praiseful title of "good opera-
tors." The difference apparently lies in whether they have been
financially successful when getting "in and out."
Actually, getting in and out and other types of adjusting are
good business practices if such changes are based on adequate in-
formation; however, often such decisions are not carefully thought
out, so that many farm managers get out when they should stay in
or get in when they should stay out.
Those who undertake feeding operations may be said to be
in a continual learning situation with respect to the enterprise.
However, with any given group of feeder cattle, an operator often
finds himself forced to take somewhat irreversible actions regard-
less of his state of knowledge. Thus, before buying feeders the
operator can decide to buy a few or many, depending on the
prospective corn supply and other factors. The age of the animals
bought depends somewhat on the operator's feed supplies and
experience but also on his estimate of the future strength of the
fat-cattle market. Therefore, if the short-run market seems to be
the safest bet, feeders favor big cattle to finish in 2 to 4 months.
Long-fed, young animals not requiring a large initial investment
are also relatively safe as far as long-run price declines are con-
cerned. Calves and yearlings offer more flexibility and involve
the feeder in fewer forced-action situations than older animals,
allowing the operator to change strategies as long as heavy grain
feeding has not progressed far. Calves are particularly flexible, if
the farmer has enough pasture and roughage to make it possible
to postpone the fattening period by roughing the calves through
one winter and grazing through the following summer, perhaps
even roughing through still another winter before finishing them


[Jan.,







DECISION-MAKING PRINCIPLES


out. Further, a farmer always has the alternative of remarketing
these animals as feeders.


Concerning Production Methods

Variations in forage yields and requirements create
important problems
Yields of pasture, hay, and grass silage are highly variable -
they depend on changes in weather, the season of the year, grazing
and harvesting practices, and a wide variety of other factors. Simi-
larly, the demand for hay and pasture on particular farms varies
with weather, the seasons, the kind of livestock produced, and the
production plans followed. Farm managers thus often face the
problem of not knowing enough about forage yields and require-
ments to coordinate their forage and livestock production plans
completely.
Some farmers in such situations feel that they do not know
enough about forage and livestock production to engage in com-
mercial production .of forage-consuming livestock at all. Among
such farmers are two more or less distinct types. Farmers of the
first type feel that what they could learn would not be worth the
effort, hence they do not engage in commercial production of
forage-consuming animals and do not try to learn about such
production problems. They are in the inactive situation described
on page 12. Farmers of the second type, on the other hand, feel
that what they could learn about such production processes would
be worth the cost and effort of learning. They are in the learning
situation described on page 12. As a result, the second type of
farmer engages in various learning processes with the object in
mind of eventually engaging in forage production and feeding
operations.
By and large, the learning techniques used fall into two cate-
gories. In some instances, farmers concerned with forage and
livestock production problems reason inductively from observed
experiences, experimental data, and isolated facts to generaliza-
tions concerning a universe of facts. In such cases they can use
the principles and generalizations presented on pages 33 to 35. In
other cases, farmers reason deductively with budgeting and eco-


1953]







BULLETIN No. 593


nomic principles to arrive at the implications of a set of facts
known or assumed to be true; that is, they can make particular
use of principle 1, page 33. More often, inductive and deductive
reasoning are used together in drawing conclusions.
In pasture production, perfect knowledge as to yields can never
be acquired. Hence, managers may try to devise strategies to re-
duce the impact of variation in pasture yields on their business.
A Kentucky Agricultural Experiment Station publication indicates
that farmers can reduce variation in pasture yields by four main
methods:' (1) choice of plant mixtures; (2) such practices as
rotation grazing, seasonal applications of fertilizer, mowing and
underutilization of pasture to leave residuals for consumption in
short periods; (3) storage of surplus pasture forage for use in
deficit periods; and (4) control of the soil water supply. Each
of these methods has a cost; each produces valuable stability.
Obviously, it does not pay a farmer to spend more for additional
stability than such stability is worth. In a forced-action situation
a farmer would want to select the alternative, among those open
to him, that would involve the smallest possible loss '(see item 1,
page 37).

Imperfect knowledge and soil conservation
The current imperfect state of knowledge concerning the costs
and benefits of soil-conserving systems tends to inhibit the accept-
ance of such systems. Technical input and yield data are missing
in some instances; in others available data are not well known.
A farmer can be expected to plan a production organization
that he knows or feels will give him the greatest returns from his
resources consistent with the safety and leisure he desires. Thus,
a corn-belt farmer may pursue a corn, corn, oats, meadow rotation
with a moderate-sized livestock enterprise because he believes it
best, when actually a corn, corn, oats, meadow, meadow rotation
might simultaneously yield him more corn, more oats, more mea-
dow, and in addition reduce soil erosion. A corn, oats, meadow,
meadow, meadow rotation might yield less total corn, much more
forage, and do a still better erosion-control job and, under existing
price relationships, it might yield a greater and less variable in-
1E. J. Nesius, Allocation of Farm Resources for Economic Production of Pasture
Forage, Ky. Agr. Expt. Sta. Bul. 568, July 1951.


[Jan.,






DECISION-MAKING PRINCIPLES


come.' Acquisition of such knowledge would be of value to a
farmer.
A farmer can obtain such information about his specific situa-
tion by many means. He can contact his state college representa-
tives and Soil Conservation Service personnel. Such people can
often provide him with facts that will enable him to formulate
plans for his farm. Contact with other farms, experimentation,
and reading are also ways of learning. Here the problem is one
of speeding up the rate at which new information is acquired, of
assessing the value of such information, and of reducing the cost
of acquiring and analyzing the information (see pages 22 and 27
for a statement of principles).

Diversification is a technique for reducing risks
Cropping systems are sometimes diversified beyond the point
most advantageous from the standpoint of complementarity and
supplementarity; that is, additional crops are sometimes grown
to reduce variability in total income from a cropping system.
Some farmers prefer a steady income to a highly variable income,
even though the latter may give them a greater average income
over time. (See the psychological patterns presented on page 37.)
Certain rotation systems adopted by farmers illustrate this
procedure. In small-grain areas of the Great Plains, summer fal-
lowing is an important weed-control and moisture-conservation
practice. One year in four is usually adequate for weed control,
and more than one in three or four for moisture means that a large
proportion of the land is not in direct production. In other areas
every other year summer fallow may produce as much wheat, at
lower costs, than less summer fallow. But a number of Great
Plains farmers continue to use systems that involve larger acreages
of fallow land than profitable from a dollars and cents point of
view in order to stabilize grain yields, and thereby stabilize in-
comes. By following such crop sequences they forego high total
production in order to secure protection against dry weather.
In farm areas where a particular product has a high compara-
tive advantage but experiences great uncertainties in price or
yield compared to other products, it is common strategy to com-

1 Earl O. Heady and Harald R. Jensen, The Economics of Crop Rotations and
Land Use, Iowa Agr. Expt. Sta. Res. Bul. 383, 1951.


1953]







BULLETIN NO. 593


bine such an enterprise with one that is relatively more certain
(see insurance principle 3, page 36). The latter enterprise pro-
vides the farmer with a stable income component at a sacrifice in
total income over time, while the former provides the bulk of the
income and a chance to hit the jackpot.
Forage-consuming livestock on lands that have a high com-
parative advantage in cash-grain production in the Great Plains
provide an example of this. On some farms more cattle are kept
than are necessary to utilize nonarable land and the minimum
amount of pasture for a rotation. This reduces the land available
for wheat production. The comparative advantage of wheat is
such that every arable acre taken from this use beyond that re-
quired for soil management and put into livestock uses represents
foregone money income. The gain offsetting this money cost is
the increase in stability.
Yields and incomes became so stable in the 1940's or the com-
parative advantage of grain increased so much, that many Great
Plains livestock enterprises have disappeared, even to the point
of undergrazing nontillable pastures. Farmers presumably feel
that this source of income stability is no longer needed or is too
costly relative to the income and leisure foregone.1 Like any form
of insurance, it hurts a little to give up the premium (higher
foregone income from grain) but the feeling of security is valued;
if the worst happens, the more stable source of income and the
liquid capital reserve that the beef or dairy herd provides will tide
a Great Plains family over a few years of low prices or low yields.
The question is whether the value of such security to the indi-
vidual concerned exceeds its cost.


Concerning New Developments and Inventions

Changes affect the value of building investments
Farm buildings represent rather definite long-term commit-
ments on the part of the farmer. The farmlands of this country,
particularly in the Great Plains, are dotted with horse barns which
stand as monuments to past production methods. These barns

SIn some cases other forms of stability have been substituted, such as cash
reserves, crop insurance, large scale of operations, summer fallow, and rotation
changes.


[Jan.,






3L)CISION-MAK[NG PRINCIPLES


can be adapted only with difficulty to the type of farming now
carried on. There is need for much forethought in making de-
cisions in regard to new farm buildings. Because needs for build-
ings change, farmers are torn between the alternatives of construct-
ing efficient (for one purpose) inflexible one-use buildings and
less efficient (for one purpose) but flexible buildings (see the
flexibility principles, items 2 and 3, page 33).
In this day and age of rapidly changing technology and market
situations, a farm manager can protect himself from losses by
building flexible structures that can be re-allocated to new uses,
or low-cost semi-permanent specialized buildings that can be
quickly depreciated.
In the corn belt and elsewhere, uncertainty of tenure on the
part of renters and uncertainty of future relative prices on the
part of owners often encourage the construction of low-cost, short-
lived (portable) and, sometimes but not always, less efficient hog
and poultry facilities.
Actions of this type represent adjustments to imperfect knowl-
edge concerning future events. An operator often incurs higher
fixed costs per unit produced, foregoes the satisfactions derived
from pretentious structures, and assumes certain inconveniences
and perhaps inefficiencies, for the sake of greater safety (insurance)
and greater ability to readjust (flexibility).
Lack of knowledge concerning the future usefulness and prod-
uctivity of a long-lived capital investment often makes it good
policy to discount incomes from such items at a high rate in plan-
ning, budgeting, and in income tax computations. Such discount-
ing results in safety but also has a cost. High discounting in
budgeting prevents receipt of certain risky incomes. High dis-
counting for tax purposes may result in higher future taxes.
Discounting is properly used when the value of additional dis-
counting is equal to these costs. (See item 2, page 36.)

New inventions create investment problems
The introduction of new machines may necessitate heavy ad-
ditional capital commitments, make former investments obsolete,
and require other organizational changes. The combine-thresher,
for instance, at first slowly and now more rapidly, is replacing
threshers for small-grain harvesting all over the United States.


1953]






BULLETIN No. 593


Whether the individual farmer buys a combine or other new
machine depends upon his resource position, the expected capital
loss due to a change, the comparative costs, the comparative labor
and other resource requirements, other alternatives for this invest-
ment, and whether the individual considers "the new-fangled
thing important to him anyhow."
The farmer, currently caught short of capital funds, who has
stretched his credit to the limit and who feels that the liquidation
of other farm resources to acquire a combine would be uneconomi-
cal, is forced to decide not to take what otherwise appears to be
a desirable action. If a farmer feels that such investments would
be wise but is limited by lack of credit, he is caught in an external
capital rationing situation where institutional lenders are not as
certain as he is concerning his ability to make repayment either
from his assets or his income.
In the more usual situation, a grain farmer who does not own
a combine wants to know if he should buy one. What processes
should he go through before taking action? What information
does he need to make a decision? He should try to ascertain the
labor and fuel requirements and their seasonal distribution under
the new technology versus the old; he should also learn about
costs and returns in the alternatives open to him.' This is a case
of deducing the implications of a set of data and information. The
farmer sets down (in more or less of a budget form) the facts he
has available to aid in formulating a solution to his specific prob-
lem and then determines, by their logical implications, whether
or not to replace threshing with combining. The situation pic-
tured may be brought to a head by a labor shortage. If the farmer
still is not sure, custom combining may be a temporary alternative
to purchasing. The time to learn gained by the use of custom
combines often has a cost in the form of high custom rates relative
to the foregone opportunity of using one's own combine; hence,
it is necessary to be sure that additional time so purchased does
not cost more than it is worth. If the time so purchased is to have
value, it must be used in learning. (See the flexibility principles,
items 6 and 7, page 34.)
Budgeting is a technique whereby the individual may formally
1Timeliness would be reflected in reduced costs and changes in quality of
product in returns.


[Jan.,







DECISION-MAKING PRINCIPLES


compare alternatives. For this approach to be effective, a farmer
must glean facts efficiently, ask the right questions, and observe
the right data (See item 1, page 36) He can protect himself from
extreme consequences of wrong decisions by making decisions that
involve lower capital costs until he knows more about the type
of machine he is buying. That is, he may acquire safety by incur-
ring greater per unit costs on short-run operations by using custom
work, buying small machines, or using less efficient "old type"
machines. (See item 2, page 36.)
Antibiotics make learning important
Technological changes create the need to learn. What kind of
evidence or knowledge should be on hand before adopting a new
product or idea? The old adage is "be not the first by which the
new is tried nor yet the last to lay the old aside." (See items 3
and 4, page 35.)
Antibiotics are a case in point. Compounds such as strepto-
mycin, aureomycin, penicillin, and B12 have been reported as
giving (1) phenomenal feed savings through increased daily gains
and reduced death losses when added to hog and broiler rations,
and (2) increased egg production and feed efficiency when used
in laying mashes. There are also reports to the contrary.
Farm magazines have painted glowing pictures of the ad-
vantages of antibiotics in the feeding of nonruminants. Feed and
pharmaceutical companies have advertised them widely. Many
farmers know neighbors who have had seemingly good success with
these compounds. Yet some people, farmers and researchers, have
found evidence to the contrary. In analyzing such evidence, farm-
ers discover that the difficulty may be due to a number of things.
Antibiotics are, among other things, germ killers. Therefore, when
used in hog feed, antibiotics rid the hogs of certain bad (and good)
micro-organisms. This, in turn, makes them thrive, thereby in-
creasing gains and bringing about feed savings not otherwise pos-
sible. It follows that hog herds not affected with such undesirable
micro-organisms do not give similar responses. The same com-
pounds fed to ruminants (cattle, sheep) could actually destroy the
organisms that synthesize proteins in their digestive systems. Re-
searchers have found that some antibiotics and combinations of
antibiotics give responses, and that some do not. The researchers
do not as yet know why.


1953]







BULLETIN No. 593


What should an individual farmer do in this and similar situa-
tions where technological changes not entirely accepted under
farm conditions are introduced? In this case, the cost of trying
antibiotics is probably small and the gains may be great. The
information to be gained probably has a fairly high value and
can be obtained at a low cost by experimenting with antibiotics
as a method of learning about them in one's specific situation.

Introduction of new plant sprays and powders
create managerial problems
Scientists have also presented us with sprays and powders which
help to control weeds, insects, and rodents. These chemicals, while
producing many beneficial effects, are not entirely proved and are
capable of producing undesirable side effects. How can a farmer
learn more about them, their advantages and disadvantages for
his farm, and still protect and insure himself? There is sometimes
a premium on getting into a new thing quickly, as was the case
with hybrid corn. How can a farmer speed up the process by
which he decides what is a good innovation to adopt? A "wait
and see" attitude involves costs which must be offset by the value
of what is observed or seen. On first hearing about sprays, farmers
could speed up the rate at which they gain knowledge by (1) ask-
ing their county agents, (2) writing to their state experiment sta-
tions for further information, or (3) contacting dealers about
them. Formal or informal records are advantageous in keeping
observations and providing essential data with which to judge
whether additional returns due to new sprays are greater than the
additional cost of such sprays. An approximation of this can be
obtained beforehand by setting down the pros and cons, the costs
and returns, on the basis of the best data available. (See item 1,
page 33.)
Summarizing, a farmer wishes to learn about new techno-
logical changes rapidly and efficiently. He wants to know whether
they will pay on his farm. He wants to know how they affect his
use of land, labor, and capital. The sooner he knows, the better.
Farm radio broadcasts, newspapers, magazines, and other publica-
tions, conversations with neighbors, observation of their practices,
and county agents help him in his constant quest to reduce un-
knowns to knowns, to reduce variability in outcomes. On his own


[Jan.,







DECISION-MAKING PRINCIPLES


part, he must become a good observer, watching the steps in suc-
ceeding events, to help in formulating his decisions. The keeping
of financial and other records in farm operation and specific enter-
prises and trials provide him with basic data for planning future
operations. Budgeting is a deductive process that formalizes plans,
crystalizes analysis, and thereby reduces the possibility of errors.
Therefore, although a farmer does not have perfect knowledge
concerning sprays and other new developments, he can learn more
about them, perhaps enough to make a positive decision in regard
to a trial. New developments, as knowledge grows concerning
them, may become a permanent addition to everyday practices;
that is, the manager becomes subjectively certain (see page 13)
with regard to such practices.

Concerning Human Behavior and Capacities
Personalities must be handled
Changes in the people associated with a farm business are im-
portant sources of both trouble and benefits. For instance, changes
in the integrity and reliability of a farmer, his wife, and his chil-
dren often have tremendous impacts on individual businesses.
High integrity and reliability open the door of business the re-
verse closes it. Changes in the integrity and reliability of persons
with whom business is done are also important a dishonest hired
hand, unreliable credit men, "shady deal" traders, and such all
have their possible impacts on a farmer's business.
What are the principles followed by managers in handling
these personality changes? Basically, the principles fall into two
categories: The first category contains principles for learning
about changes in personalities; the second contains principles for
protecting a business against such changes. (See strategy prin-
ciples, pages 34-36.)
Thus, managers attempt more or less continually to appraise
and evaluate the integrity and reliability of persons associated
with the business. Experience helps them decide what to observe
as a basis for analyzing personalities. This type of uncertainty
makes it necessary for managers to engage in both inductive and
deductive reasoning. Yet, despite such efforts farmers are often
unsatisfied concerning what they know about the personalities


1953]







BULLETIN No. 593


they deal with. Hence, they look around for ways and means
(strategies) for protecting their businesses against such changes.
Among such forms of protection are various types of formal
and informal insurance schemes. (See page 36.) Some managers,
for instance, carry heavy liability insurance on their automobiles
as protection against the possible wrecks of careless teen-age sons.
Sometimes in agriculture, and much more commonly in industry,
employees are bonded to insure against dishonesty.
In agriculture, most insurance schemes for handling the risks
and uncertainties arising from personalities are informal. Wages
to unreliable people are reduced to provide a financial cushion
against the effects of their unreliability. Lending agencies charge
higher interest rates or refuse to make loans at existing rates to
unreliable or unknown farmers. (See items 2 and 3, page 36.)
Leasing arrangements such as written contracts, short leases, auto-
matic liens provide safeguards for both landlord and tenant against
the capriciousness and possible dishonesty of each other (see item
2e, page 37). Another technique widely used in handling un-
reliability and dishonesty involves their elimination through train-
ing and development of pride in moral and productivity standards.
Religious thought and school and family training are thus valu-
able from a business standpoint as well as from religious, ethical
and moral standpoints (see item 2f, page 37).
Most protection (informal insurance) schemes have costs and
the protection has a value. Such schemes are used to an optimum
degree when the additional protection derived from the additional
time and effort devoted to them is just worth the cost of such
additional outlays. This is true also of the time and effort devoted
to learning about personalities.

Change and lack of knowledge are important in
personal relationships that grow up in local
bargaining situations
In farming, items and services about to be put up for sale often
have special location value for the buyer or the seller or both.
A parcel of land, for instance, may have a special value for the
seller because it adjoins a tract of land already owned and oper-
ated. Similarly, the same parcel of land may have a special value
for a prospective buyer because it is also adjacent to land he owns


[Jan.,







DECISION-MAKING PRINCIPLES


and operates. In this case, both buyer and seller attach more value
to the parcel of land than other members of the economy would
place on it and it is worth more to them. The problem of pricing
the parcel of land then becomes one of personal relationships be-
tween the two individuals concerned. The bargaining techniques
employed in arriving at a price are likely to include strategic opera-
tions. Strategic operations, in contrast to those in an economy
determining a free price among many competitive buyers and
sellers, are personal in nature. The authors know of instances in
which a buyer and seller of such a piece of land have haggled and
bargained for years in trying to arrive at a price mutually accept-
able to them. Such haggling and bargaining often include: (1)
attempts on the part of the buyer to cover up how much he really
wants the land, (2) attempts on the part of the seller to build up
the value of the land in the eyes of the prospective buyer, (3)
attempts on the part of the seller to indicate that he is really not
interested in selling the land, whereas he is actually willing to sell
at a high enough price, and (4) a wide variety of other subterfuges
more or less bordering on deceit. (See page 37, items 2a to 2f.)
In such cases, buyers often wait for a strategic time in which
to buy the piece of land. The strategic time is likely to involve
financial embarrassment on the part of the seller, the settlement
of his estate, or some other more or less personal situation which
makes him or his heirs willing to part with the land.
The above discussion indicates that often farm managers do
not deal in impersonal competitive markets of the nature assumed
in competitive economic theory. Instead, buyers and sellers often
confront each other in a very personal relationship, each trying to
influence and outdo the other. Lest the reader think that this sort
of procedure is unimportant in agriculture, let him recall that a
"good bargain" in the purchase of land greatly strengthens a
farmer's credit position and his ability to command both working
and investment capital for the proper operation and development
of his farming operations. On the other hand, a poor bargain in
buying land may wreck a farmer's credit position and reduce his
income for years.


1953]







BULLETIN No. 593


Concerning Institutions
Changing governmental arrangements
create managerial problems
Governmental arrangements are always more or less temporary.
Thus, farm incomes which depend on governmental arrangements,
like milk marketing agreements, production control, and price
support programs, are never perfectly foreseen.1
An outstanding government arrangement that affects farm in-
comes exists in the burley-tobacco producing states in the southern
fringe of the midwest Kentucky, Tennessee, Missouri, Kansas,
Indiana, and Ohio. In these states, acreage control and price sup-
port programs have maintained an artificially high price for bur-
ley. This in turn has caused acreage allotments to have values
ranging above $1,000 an acre in areas having the highest com-
parative advantage in burley production. These values, as a matter
of fact, are partially included in prices paid for farm land.
Farmers in these areas have had the problem of adjusting to
the possibility that the acreage control and price support programs
might be eliminated, with consequent destruction of investments
in acreage allotments. First, the farmers had the problem of secur-
ing some idea of what an acreage allotment for a particular farm
was worth for a given year: Second, they had the problem of
appraising how many years such increased incomes would exist.
Then, on the basis of such information, they had to determine
the present value of an acreage allotment for a particular farm.
Such values do exist and are regularly priced in connection with
the sale and purchase of lands.
How did farmers adjust to this situation as it developed after
1933? Early in the operation of the programs it became evident
that they affected land values. Farmers found this out by follow-
ing varying processes of reasoning. Some reasoned that prices of
land should be increased if the programs affected burley prices.
Others observed that prices of land were increasing. The first type
reasoned deductively; i.e., they mentally determined an implica-
tion of a fact known or assumed to be true. The other set rea-

1 While government arrangements are themselves subject to change, there is
strong reason to believe that many such arrangements, like farm price supports, milk
marketing agreements, and crop insurance programs have reduced the uncertainty
in farming more than they have increased it.


[Jan.,







DECISION-MAKING PRINCIPLES


soned inductively; i.e., they reasoned that what was happening to
the price of the relatively small number of land parcels sold was
happening to all similar land. (See items 1-9, pages 33-34.)
Because the future of the programs has never been perfectly
foreseen, farmers have never been able to feel that the increased
income from an acre of allotment would exist for a long period of
time. A current study of the control programs carried out by one
of the authors indicates that in 1948 the program probably main-
tained the price of burley about 10 cents above the level that
would have existed had no programs been in effect. Assuming
10 cents to be a usable figure, a yield of 2,000 pounds per acre
(a not uncommon yield in the central Bluegrass area of Kentucky),
would increase in value by $200 per year.1 Figured at 5% interest,
a series of $200 annual incomes extending indefinitely into the
future would be worth $4,000. Yet the weight of evidence is that
allotments seldom bring $2,000; $1,000 per acre is probably more
common in areas of high comparative advantage. This difference
indicates that farmers are setting up safety factors and heavily dis-
counting the future incomes that might be received under the
programs. (See item 2, page 36.) Apparently, farmers think, on
the basis of what they can learn about the operation of the pro-
grams, that it is safe to count on the continued existence of the
programs for another 5 to 10 years. These safety factors have a
value to land purchasers because they guard him against losses.
Similarly, these safety factors have a cost; i.e., if a farmer refuses
to pay more than $1,000 for what may turn out to be 20 annual
$200 incomes, he forgoes a possible $3,000 (not making an allow-
ance for interest, or if allowance is made for interest at 5% he
foregoes $1,528). The security as a safety factor, has both a cost
and a value. These values and costs are personal and subjective
in nature and should be equated at the margins.

Miscellaneous Examples
Two kinds of mistakes can be made in
choosing between two alternatives
When a livestock farmer is choosing between planting a cash-
grain or a feed crop, he is in danger of making two distinctly dif-
1When the use of 8.6 acres of burley base for one year was offered on a highest
bid basis near Lexington, Ky., farmers' bids ranged from $100 to $176 per acre. The
successful bidder was required to plant fall cover, furnish his own fences and barn,
and pay cash in advance.


1953]







BULLETIN NO. 593


ferent types of error. He can make the error of choosing cash
grain and being wrong. Or, he can make the error of refusing to
grow cash grain and being wrong.1 The first type of error has the
additional consequence of eliminating a part of the feed base for
his livestock enterprises whereas the second type of error does not.
Thus, in analyzing such problems and in making such decisions,
it is important to consider separately the two kinds of errors that
can be made in choosing between two alternatives. (See items
6 and 7, page 35.

Long-chance takers trade secure incomes
for risky incomes
Farmers, agricultural economists, and businessmen experience
great difficulty in anticipating future land values. Individuals,
however, attach great importance to land ownership. And, because
they attach such importance to land they are likely to take large
risks in trying to establish ownership.
In taking such risks, elements of gambling-are involved. Under
such circumstances an individual exchanges a relatively low, stable,
real income for chances at two other levels of real income; i.e.,
he receives a small probability of "making the grade"and becom-
ing an owner with all attendant rights and privileges but at the
same time he runs a large chance of failing and receiving a lower
level of real income.
Sensible people do not take long chances unless the combined
chances of getting the resultant high or low incomes are worth
enough more to them than their present certain income to cover
the costs of taking the action. In a "gambling joint" such costs
are referred to as a "cut for the house," whereas in business gam-
bles, as in long-chance land purchases, such costs include among
other costs brokerage fees and title fees. (See the long-chance
principle, page 37.)

Summary of Principles and Generalizations
The above examples have illustrated the use farm managers
make or can make of certain principles and generalizations in
1 These are the Pearson-Neynan type-one and type-two errors. In the first case
the farmer rejected Ho (that the feed crop was best) and was wrong. In the second
case he accepted Ho (that the feed crop was best) and was wrong. See C. W. Church-
man, Theory of Experimental Inference. The Macmillan Company, New York,
1948, pp. 8-9.


[Jan.,







DECISION-MAKING PRINCIPLES


handling change and acquiring knowledge. This summary out-
lines and presents in an orderly way the principles that are useful
in similar situations. Not all of the principles outlined and pre-
sented here are drawn from the above examples. Instead, an at-
tempt is made to be somewhat more complete than was possible
in the limited amount of space available for illustrations and
examples.
First among the principles for handling change and acquiring
knowledge is not to spend more, in time, foregone alternative
opportunities, money, and effort, in performing additional
amounts of any of the managerial functions than such additional
performance is worth.
Simple and obvious as this statement appears, it is still the
important economic principle. All other principles are less general
and apply to fewer of the different (1) kinds of change and im-
perfect knowledge on one hand and (2) degrees of imperfect
knowledge on the other. The value and the cost of performing
the different managerial functions are generally personal and
subjective in nature.

Principles and Generalizations Having To Do With Learning
1. Organized systems of thinking (such as those incorporated
in budgeting procedures, systems of economic principles, the land-
use approach to farm organization, and schemes of logic) decrease
the cost of making observations and analyzing by:
(a) concentrating attention on the more important facts, thereby
eliminating expenditures of time and effort on useless facts,
and
(b) insuring that the necessary types of facts will be gathered.
2. When facts and data become available slowly with the pas-
sage of time, attention to the sequence in which the facts and data
become available is desirable because:
(a) that sequence often helps explain observations, and
(b) economic information tends to lag and contain trends that
are useful for purposes of prediction.
3. When valuable facts and data become available with the
passage of time, it often pays to spend money, time, and effort post-


1953]







BULLETIN No. 593


poning decisions until more such facts and data become available.
The ability to postpone decisions is referred to as "flexibility."
4. While learning and decision making generally have value, it
pays to substitute habit, custom, and tradition for these procedures
whenever the cost of the resultant errors and the value of the ex-
perience gained do not exceed the cost of learning and decision
making. (Such costs may occur in both monetary and personal
terms.)
5. It is unnecessary to learn unless a problem exists. Problems
exist because situations differ from what it is believed they should
be; therefore, beliefs are important in deciding what should be
learned, observed, and analyzed.1
6. More should not be spent for additional information than
such additional information is worth, and equal expenditures (in
time, money, and effort) should return knowledge of equal value
in all alternatives if the optimum amount of information is to be
acquired.
7. The accuracy of estimates, choices between alternatives and
decisions, eventually increases at a decreasing rate as the number
of observations used increases.2
8. The per unit cost of accuracy (in time and effort) increases
as the number of observations used increases.3
9. Learning is a cumulative process; hence, in appraising the
value of the results of observing and analyzing, allowance must be
made for the value of the "experience gained" as well as for the
immediate value of the results.

Strategy and Generalizations
Of Use in Deciding How Much Chance To Take
1. The seriousness of a given mistake in an estimate, choice,
or decision depends (among other things) upon the size of the
mistake; that is, how far the estimate is wrong or how great the
difference between the alternatives. The accuracy of the estimate,

1 Ignorance is often, but not always, believed to be a situation worth remedying.
SThe principle is as basic to the production and utilization of knowledge as the
law of diminishing returns is in physical production or the law of diminishing utility
is in consumption.
3 This cost relationship, of course, depends upon the preceding principle much
as the nature of a marginal cost curve depends upon the law of diminishing returns.


[Jan.,






DECISION-MIAKING PRINCIPLES


choice, or decision, on the other hand, depends both upon the
probabilities (number of chances per hundred) of making the
given mistake (or error) and upon its size.
2. A decrease in the size of a possible mistake without an in-
crease in the probabilities of making the mistake is an increase in
accuracy, and vice versa. A decrease in the probabilities of making
the mistake without an increase in the size of mistake is an increase
in accuracy, and vice versa.
3. Insistence on an unusually high degree of accuracy tends
to increase the amount of facts and data required to make de-
cisions, choices, and estimates. When the amount of data and
facts available depends upon the passage of time, insistence on an
unusually high degree of accuracy causes delay, unemployment of
assets, and reduced (on the average) but more certain incomes.
4. High tolerance for inaccuracy, on the other hand, tends to
decrease the amount of facts and data required to make decisions,
choices, and estimates. When the amount of data and facts avail-
able depends upon the passage of time, tolerance of inaccuracy
eliminates delay, keeps assets more fully (but not necessarily more
efficiently) employed, and results in less certain and (often) lower
incomes.
5. The value of accuracy and the seriousness of losses resulting
from mistakes are personal and depend upon a long list of items,
including the psychological nature of the manager, his wants,
tastes, preferences, his family obligations, his age, his debts, and
his assets. The foregoing list is by no means complete.
6. In choosing between two alternatives, two kinds of errors
can be made: (1) the first alternative can be accepted as correct
when in fact it is wrong, and (2) the first alternative can be re-
jected as wrong (that is, the second alternative is accepted) when
in fact it (the first) is right. As the consequences of these two
types of errors often differ, it is important to consider separately
the two types of mistakes in making changes between alternatives.
7. Also decisions concerning proposed single actions involve
two different errors often having very different consequences. For
-instance, the result of vaccinating hogs for cholera when it is not
necessary is loss of the vaccination expenses, whereas the result
of not vaccinating when it is necessary is loss of the herd.
8. As incomes increase, people can simultaneously sustain







BULLETIN No. 593


greater losses and spend more on attainment of security or ac-
curacy.
9. As equity decreases or conversely as borrowing increases,
the danger from errors in predicting prices and yield responses
increases. This danger, of course, is one of having equity fall to
or below zero.

Insurance principles1
1. It cannot be worth while carrying insurance against losses
unless the personal value or importance of losses increases at an
increasing rate; that is, unless the last $100 of a $10,000 loss "hurts"
worse than the loss of a $100 insurance premium. The odds of
successful insurance schemes are always sufficiently against the user
to pay the costs of, and perhaps profits for, operating the insurance
schemes. Users of insurance exchange a larger (but less sure)
higher average income for a lower (but more certain) average
income. It is worth while insuring only when the lower more
certain income is worth more (personally) than the higher less
certain income.
2. Informal insurance schemes can be set up by refusing to
take action except when prospective returns are high enough to
pay the costs of bearing the risks involved. A part of the cost of
operating such schemes is the foregone income. Thus, as addi-
tional income opportunities are foregone in setting up additional
insurance schemes, such costs must be matched against the value
of the additional insurance secured.
3. Informal insurance schemes can be set up by combining
risks as protection against failure. The costs of such insurance
occur as a result of participating in more activities than would be
profitable in the absence of risks. Such additional costs must be
matched against the value of the additional protection secured.
Diversification beyond the amount that is advantageous because
different crop and livestock enterprises complement and supple-
ment each other is an example of this type of insurance scheme.
4. Pessimism, which is the same as overestimating the chances
of disaster, can incorrectly make it appear advantageous to insure

'M. Friedman and L. J. Savage, "The Utility Analysis of Choices Involving Risk,"
Journal of Political Economy, 56:279-304, 1948.
K. E. Boulding, A Reconstruction of Economics New York: John Wiley and
Sons, 1951, pp. 121-6.


[Jan.,







DECISION-M.AKING PRINCIPLES


even when the importance of losses does not increase at an increas-
ing rate.
The long-chance principles'
1. It cannot be worth while accepting, at unfavorable odds,
(1) a small chance of a large gain or (2) a large chance of a small
loss, in exchange for a more certain income unless the personal
value and importance of gains increases at an increasing rate.
2. Under long-chance principles, optimism, which is the same
as over-estimating chances of success, can make it incorrectly ap-
pear advantageous to take long chances, even when the importance
of gains does not increase at an increasing rate.
Some other strategy principles2
1. A principle that can be followed in risky situations is to
select that alternative course of action that minimizes the maxi-
mum losses which can be incurred.
2. In dealing with personalities who can in turn react to
strategy, the following strategies often have value:
(a) A random, apparently nonlogical course of action often con-
fuses the person in question.
(b) Covering up of actions often confuses the person in question.
(c) Nonrevelation of intentions prevents the person in question
from taking effective counteraction.
(d) Uncovering of the intentions of or logical patterns of action
taken by the personality being dealt with makes it easier to
handle him.
(e) The use of force resources (economic, political, social, etc.),
covering up, and misleading within legal and moral limits
is necessary when competing with persons who use similar
strategies.
(f) Reconstruction of the systems of importance held by the
person in question often makes it possible to handle him
more advantageously. (See items (2) and (3) page 29.)

Some Psychological Patterns Concerning3
The Value of Gains and Losses
1. Persons normally attach increasing importance to additional
losses up to a limit and then decreasing importance to additional

1M. Friedman and L. J. Savage, op cit. K. E. Boulding, op cit., pp. 118-21.
J. McDonald, op. cit. J. von Neumann and 0. Morgenstern, op. cit.
3 M. Friedman and L. J. Savage, op. cit.


1953]







BULLEIIN No. 593


losses beyond such levels; hence persons ordinarily do not insure
against losses beyond some limit.
2. Persons normally attach increasing importance to additional
gains up to a limit and then decreasing importance to additional
gains beyond such limits; hence, persons ordinarily do not take
long chances for stakes beyond some limit.
3. The importance attached to possible gains and losses depend
on many factors such as the psychological nature of the manager
his family obligations, the beliefs and values of his neighbors and
members of the community, his education, the amount of analyti-
cal experience he has had, his asset position, his debts, his age, etc.
4. Newly rich and newly poor persons are apt to be "abnormal"
with respect to the importance attached to losses and gains and,
when abnormal, may run to either extreme, i.e., toward security
seeking or risk taking.
5. People who are abnormal with respect to the importance
of losses and gains include the extreme long-chance taker and the
extreme security seeker. The extreme security seeker will pay
abnormally large amounts for security (perhaps even at the ex-
pense of his own and his family's welfare). The extreme gambler
will pay abnormally large amounts for a chance of "hitting it
rich" (perhaps even at the expense of his own and his family's
welfare).

Summary
The body of economic literature dealing with management
and its functions has several implications for the field of farm
management. The literature indicates, for instance, that the exist-
ence of change and the lack of knowledge creates the need for
management. Thus, a center is needed in each business for the
purpose of acquiring, analyzing, and adjusting information thereto
- that center is management, and its functions are those of ob-
serving, analyzing, deciding, taking action, and bearing responsi-
bility.
Reflection on these concepts indicates that managers are main-
ly concerned with problems falling in five subject-matter areas:
changes and lack of knowledge concerning (1) prices, (2) pro-
duction methods and responses, (3) inventions, (4) human be-
havior, and (5) economic, political, and social institutions.


[Jan.,







DECISION-MAKING PRINCIPLES


Further thought indicates that managers find themselves in
one of five different knowledge situations with respect to a given
problem. Examination of these five situations provides a useful
basis for learning managerial principles. The five situations are:
(1) the inactive situation, in which available information is in-
adequate for a decision concerning a contemplated action and in
which the cost of acquiring more information exceeds its value;
(2) the learning situation, in which available information is in-
adequate for decision and in which the value of acquiring knowl-
edge exceeds its cost; (3) the forced-action situation, in which
available information is inadequate but in which action is forced
by outside circumstances;' (4) the subjective risk situation, in
which available knowledge, though imperfect, is adequate for
either positive or negative action and in which the cost of addi-
tional knowledge equals its value; and (5) the subjective certainty
situation, in which knowledge is complete enough for managers
to act as though they had perfect knowledge. The first three of
these situations all involve inadequate knowledge; they can be
grouped together under the label of subjective uncertainty.
Several principles in economic and statistical literature serve
to increase the efficiency with which the five managerial functions,
outlined in the first paragraph above, are performed. These prin-
ciples have to do with learning (observation, analysis, and, in part,
decision making) and strategies with certain psychological pat-
terns serving to explain partially the risks which managers will
accept and the degrees of security they try to attain. See pages
32 to 37 for a summary of the principles and generalizations con-
cerning learning, strategies, and psychological patterns.
Examination, in the manuscript, of a large number of mana-
gerial situations faced by farmers serves to illustrate the wide ap-
plicability of the above summarized principles and generalizations
to the management of farms.


SSee note 1 p. 13 for a discussion of the forces.


1953]








BULLETIN No. 593


Bibliography

ARROW, K. J.
1951. Social choice and individual values. John Wiley & Sons, Inc. New York.
BARBER, E. L.
1947. Production risks of the individual farmer, with particular reference to
weather risks. Agr. Finance Rev. 10:47-54.
- and HORTON, D. C.
1948. Measuring and interpreting farm production risks. Agr. Finance Rev.
11:28-38.
-- and TIIAIR, P. J.
1950. Institutional methods of meeting weather uncertainty in the Great Plains.
Jour. Farm Econ. 32:391-410.
BOUCHER, G. P.
1948. Risk and uncertainty in agricultural entrepreneurship. Econ. Annal.
18:85-8.
BLACK, J. D.
1926. Introduction to production economics. Henry Holt and Co., New York.
BOULDING, K. E.
1950. A reconstruction of economics. John Wiley & Sons, Inc. New York,
Chapman Sc Hall, Limited, London. Ch. 7, pp. 117-35.
BROWNLEE, O. H.
1943. Some considerations on forward prices. Jour. Farm Econ. 25:495-504.
-- and GAINER, WALTER D.
1949. Farmers' price anticipations and the role of uncertainty in farm plan-
ning. Jour. Farm Econ. 31:266-75.
CLARK, J. M.
1918. Economics and modern psychology. Jour. Polit. Econ. 26:1-30, 136-66.
COPELAND, M. A.
1925. Professor Knight on psychology. Quart. Jour. Econ., 40:134-51.
DAVENPORT, H. J.
1917. Scope, method and psychology in economics. Jour. Phil. Psych. Sci.
Method 14:617-26.
DOMAR, E. D. and MUSGRAVE, R. A.
1944. Proportional income taxation and risk-taking. Quart. Jour. Econ. 58:
388-422.
EBERSOLE, J. F.
1938. The influence of interest rates upon entrepreneurial decisions in business
-a case study. Harvard Business Rev. 17:35-9.
EVANS, JR., G. H.
1949. The entrepreneur and economic theory: a historical and analytical
approach. Amer. Econ. Rev. 39:336-48.
FELLNER, W.
1948. Average-cost pricing and the theory of uncertainty. Jour. Polit. Econ.,
56:249-52.
FISHER, ALLAN G. B.
1935. The clash of progress and security. Macmillan and Co. Ltd., London.
1945. Economic progress and social security. Macmillan and Co. Ltd., London.
FRIEDMAN, M. and SAVAGE, L. J.
1948. The utility analysis of choices involving risk. Jour. Polit. Econ. 56:
279-304.
GREGORY, SIR R.
1930. Weather recurrences and weather cycles. Monthly Weather Rev. 58:
483-90.
HAHN, F. H.
1947. A note on profit and uncertainty. Economic, 14:211-25.


[Jan.,







DECISION-MAKING PRINCIPLES


HART, A. G.
1940. Anticipations, uncertainty, and dynamic planning. Jour. Business., Univ.
Chicago Special Suppl. to vol. 13.
1942. Risk, uncertainty, and the unprofitability of compounding probabilities.
Univ. of Chicago Dept. of Econ., Studies in mathematical economies and
econometrics. Univ. of Chicago Press, Chicago.
1949. Assets, liquidity and investment. Amer. Econ. Rev. 39 (Suppl.): 171-81.
HALLSTED, A. L.
1935-36. Reducing the risk in wheat farming in western Kansas. Kans. State
Bd. Agr. Bien. Rpt. 35:98-111.
HAMPSON, C. M. and CHRISTOPHERSON, P.
1934. An economic study of farms in the spring wheat area of South Dakota.
S. Dak. Agr. Expt. Sta. Cir. 19.
HEADY, EARL O.
1950. Uncertainty in market relationships and resource allocation in the short-
run. Jour. Farm Econ. 32:240-57.
1948. Flexible farming. Iowa Farm Science, 43:10-12.
HEISIG, C. P.
1946. Income stability in high-risk farming areas. Jour. Farm Econ. 28:961-72.
HICKS, J. R.
1931. The theory of uncertainty and profit. Economic 11:170-89.
1939. Value and capital; an inquiry into some fundamental principles of eco-
nomic theory. Clarendon Press, Oxford.
HURWIcz, LEONID
1945. The theory of economic behavior. Amer. Econ. Rev., 35:909-25.
JOHNSON, D. GALE
1947. Forward prices for agriculture, pp. 38-72, 200-24. The University of
Chicago Press.
JOHNSON, GLENN L.
1950. Needed developments in economic theory as applied to farm manage-
ment. Jour. Farm Econ. 32:1140-56.
JOHNSON, O. R.
1937. Acquiring farm ownership by payments in kind; a plan to permit tenants
to buy farms through annual product payments. Mo. Agr. Expt. Sta.
Bul. 378.
KALDOR, N.
1934. The equilibrium of the firm. Econ. Jour. 44:60-76.
KALECKI, M.
1937. The principle of increasing risk. Economic (N.S.) 4:440-7.
1939. Essays in the theory of economic fluctuations. Allen and Unwin Ltd.,
London.
1943. Studies in economic dynamics. Allen & Unwin Ltd., London.
KATONA, G.
1951. Psychological analysis of economic behavior. McGraw-Hill, New York.
KEYNES, JOHN MAYNARD
1935. The general theory of employment, interest and money. Harcourt, Brace
and Co., New York, pp. 147-65, 194-210.
KIFER, R. S., CHRISTOPHERSON, P. and JOHNSON, S. E.
1933. Emergency farm adjustments in the wheat area of South Dakota. S. Dak.
Agr. Expt. Sta. C. 8, 25 p. Jan. 1933.
KNIGHT, F. H.
1921. Risk, uncertainty and profit. Houghton Mifflin, New York.
1925. Economic psychology and the value problem. Quart. Jour. Econ. 39:
372-409.
1934. Risk. Encyclopedia of the Social Sci. 13:392-4.
LACHMANN, L. M.
1943. The role of expectations in economics as a social science. Economic,
(N.S.) 10:12-23.
LANCE, O. R.
1944. Price flexibility and employment. Bloomington, Ind. The Principia
Press, Inc. 114p.(Cowles Com. for Res. in Econ., Monogr. 8).








BULLETIN NO. 593


LINDAHL, E. R.
1939. Studies in the theory of money and capital. Farrar and Rinehart, pp
40-51, 348-50.
LITTLE, L. T.
1937. Economics and insurance. Rev. Econ. Studies. 5:32-52.
MCCAMY, J. L.
1947. Analysis of the process of decision-making. Pub. Admin. Rev. 7:41-8.
MCDONALD, J. D.
1950. Strategy in poker, business and war. Norton, New York.
MAKOWER, H. and MARSCIIAK, J.
1938. Assets, prices, and monetary theory. Economics (N.S.) 5:261-88.
MARSCHAK, J.
1938. Money and the theory of assets. Econometrica 6:311-25.
1941. Lack of confidence. Soc. Res. 8:41-62.
1946. Neumann's and Morgenstern's new approach to static economics. Jour.
Polit. Econ. 54:97-115.
MIGHELL, A.
1938. Trial and error in farm management. Iowa Agr. Expt. Sta. (mimeo).
NESIUs, E.
1951. How farmers make pasture plans to meet the uncertainty of weather.
Ky. Agr. Expt. Sta. Bul. 575.
1951. Allocation of farm resources for economic production of pasture forage.
Ky. Agr. Expt. Sta. Bul. 568.
PENGRA, R. F.
1947. Crop production in the semi-arid regions an insurable risk. Jour. Farm
Econ. 29:567-70.
READER, M. W
1947. Studies in the theory of welfare economics. Columbia University Press,
New York.
REISS, F. J.
1949. Measuring the management factor. Jour. Farm Econ. 31:1065-72.
RUDD, R. W. and MACFARLANE, D. L.
1942. The scale of operations in agriculture. Jour. Farm Econ. 24:420-33.
SAMUELSON, P. A.
1943. Dynamics, statics, and the stationary state. Rev. of Econ. Statis., 25:58-68;
also reprinted in Readings in economic analysis, edited by R. V. Clem-
ence.
SCIIICKELE, RAINER
1949. Farm business survival under extreme weather risks. Jour. Farm Econ.
31:931-43.
1950. Livestock as income stabilizer. N. Dak. Agr. Expt. Sta. Bimonth. Bul.
12: (No. 6): 198-203.
1950. Farmers' adaptations to income uncertainty. Jour. Farm Econ. 32:356-74.
1950. Protect farm debtors against unnecessary foreclosure? Farm Pol. Forum
(Ia. State Coll.) 3:16-20.
SCHULTZ, T. W.
1939. Theory of the firm and farm management research. Jour. Farm Econ.
21:570-86.
1950. Capital rationing, uncertainty and tenancy reform. Jour. Polit. Econ.
48:309-24.
1949. Production and welfare of agriculture. The Macmillan Co., New York.
-- and BROWNLEE, O. H.
1942. Two trials to determine expectation models applicable to agriculture.
Quart. Jour. Econ. 56:487-96.
SCOVILLE, G. P.
1951. Cows versus apples- variability in production. Farm Econ. Cornell Uni-
versity, No. 179 pp 4642-5.
SHACKLE, G. L. S.
1945. An analysis of speculative choice. Economic (N.S.) 12:10-21.
1949. Expectations in economics. Cambridge, University Press, Cambridge, Eng.


[Jan.,








DECISION-MAKING PRINCIPLES


SIMON, H. A.
1947. Administrative behavior; a study of decision-making processes in ad-
ministrative organization. The Macmillan Co., New York.
SMITH, A.
1892. The theory of moral sentiments (New Ed.) G. Bell, London.
STEINDL, J.
1945. Capitalist enterprise and risk. Oxford Econ. Papers 7:21-45.
1945. Small and big business; economic problems of the size of firms. Oxford
Institute of Statistics Monograph 1, Basil Blackwell, Oxford.
STIGLER, G.
1939. Production and distribution in the short run. Jour. Polit. Econ.
47:305-27.
SWEEZY, P. M.
1938. Expectations and the scope of economics. Rev. Econ. Studies 5:234-7.
THAIR, PHILIP J.
1950. Stabilizing farm income against crop yield fluctuations. N. Dak. Agr.
Expt. Sta. Bul. 362.
TINTNER, G.
1941. The pure theory of production under technological risk and uncertainty.
Econometrica 9:305-12.
1941. A contribution to the non-static theory of choice. Quart. Jour. Econ.
56:274-306.
1942. The theory of production under non-static conditions. Jour. Polit. Econ.
50:645-68.
1944. A contribution to the non-static theory of production. Studies in mathe-
matical economics and econometrics. University of Chicago Press, Chi-
cago.
THURSTONE, L. L.
1945. The prediction of choice. Psychometrika. 10:237-53.
NORTHERN GREAT PLAINS COUNCIL, TENURE, COMMITTEE CONF.
1950. Towards stability in the Great Plains economy. Neb. Agr. Expt. Sta.
Bul. 399.
U. S. DEPT. OF AGRICULTURE
1938. Soils and men. Yearbook of Agriculture. pp. 68-76; 171-197; 679-92.
VON NEUMANN, J., and MORGENSTERN, O.
1944. The theory of games and economic behavior. Princeton Univ. Press,
Princeton.
WALD, ABRAHAM
1947. S-naential analysis. John Wiley & Sons. Inc. New York.
1950. Statistical decision functions. John Wiley & Sons, Inc. New York.
WALSTER, H. L., and NYSTUEN, P. A.
1948. North Dakota wheat yields. N. Dak. Agr. Expt. Sta. Bul. 350.
WESTON, J. F.
1949. Profit as the payment for the function of uncertainty-bearing. Jour.
Business, Univ. Chicago 22:106:18.
WILCOX, W. W.
1943. Capital in agriculture. Quar. Jour. Econ. 58:49-64.
-- Boss, A., and POND, G. A.
1932. Relation of Variations in the human factor to financial returns in
farming. Minn. Agr. Expt. Sta. Bul. 288.
-- and LLOYD, O. G.
1932. The human factor in the management of Indiana farms. Ind. Agr. Expt.
Sta. Bul. 369.
WILL, GEO. F.
1946. Tree ring studies in North Dakota. N. Dak. Expt. Sta. Bul. 388.
WILLIAMS, D. B.
1951. Price expectations and reactions to uncertainty by farmers in Illinois.
Jour. Farm Econ. 33:20-39.




University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs