Knowledge And Decisions

Some organizations are able to tap information produced by informal relationships. Employers who hire new employees by word-of-mouth referrals from existing employees get around the problem confronting banks — namely, that those with the most relevant information have insufficient stake in the accurate communication of that knowledge. Employees who value their own future relationship with the employer will not want to recommend someone else who is likely to be a substandard employee. Reliance on such information, even by employers with personnel departments and the supposedly “scientific” selection procedures at their disposal, implies at least some areas in which the organization implicitly recognizes its cost disadvantages vis-à-vis informal relationships.

“Old boy” networks among professional colleagues with stakes in good future relationships with one another are likewise informal sources of knowledge that would be prohibitively expensive for an organization to acquire through purely organizational methods, especially in professions where the relevant characteristics are highly personal — temperament, drive, imagination, intellectual discipline — and therefore cannot be objectively specified or definitively measured by such formal devices as university degrees. Recurrent complaints of “chaotic” referral and hiring methods in such professions ignore this cost advantage of informal relationships. That this advantage can be of major proportions is attested to by (1) the persistence of such referral methods despite repeated attempts at internal reform² or even externally imposed legal requirements, as under “affirmative action,”³ (2) the dissatisfaction reported by both employers and employees using alternative and more “objective” or “rational” procedures,⁴ and (3) the willingness of employing organizations to pay the price of constricting their own options by limiting their employee choices to those other organizations in which they have sufficiently good informal information sources, thereby balkanizing a market that might easily be many times larger.⁵

Observers’ intellectual disdain and/or moral condemnation for practices which utilize the cost advantages of informal relationships often proceed on the implicit assumption that knowledge is either economically free or theoretically “given” in some cohesive block equally accessible to all. In reality, knowledge can be enormously costly, and is often widely scattered in uneven fragments, too small to be individually usable in decision making. The communication and coordination of these scattered fragments of knowledge is one of the basic problems — perhaps the basic problem — of any society, as well as of its constituent institutions and relationships.⁶

Informal relationships are not only able to acquire much knowledge at lower cost than formal organizations in some cases, but are generally able to apply it in a more specific or “fine tuned” fashion in making decisions. Among the reasons are that informal decision making is more likely than formal procedures to be incremental rather than categorical, individualized rather than “package deals,” and episodic rather than precedential.

Because informal relationships are, by definition, relatively freer of rules than are formal organizations, the former can more readily determine to what extent to do something — whether consumption of a good, work at an occupation, or involvement with another person — rather than simply whether to do it or not. Thus, for example, personal relationships have many subtle gradations from formality to intimacy, as compared to official relationships among members of an organizational hierarchy — relationships which tend to have fewer gradations and fewer nuances in the relationships between any two official positions (except insofar as these are modified by informal relationships among incumbents). A “foolish consistency” is less often necessary in informal relationships. The youngest child in a family may be a privileged character with respect to one set of rules (decorum, errors) and yet more strongly controlled than his older siblings with respect to others (safety, money). Even in cultures normally thought of as male-dominated, there are substantial areas of family decision making where a husband would seldom dream of questioning his wife’s decisions, even though such decisions may include budgeting the bulk of his income.⁷ The specialization benefits of such reciprocal or interchangeable subordination are sacrificed in a neatly hierarchical organization, where a vice-president outranks a janitor for all purposes — again, except insofar as incumbents may choose to behave otherwise so as to appropriate some of the advantages of informal relationships in a formal organization.