Behavioral Theory, as applied to business, explores the psychological bases of management, leadership and decision-making. It is applied to all aspects of a business, from studies of the psychology of dealing with employees, through specific areas of research such as behavioral finances.
Behavioral Theory applies psychology to the study of human judgment and biases in decision-making under conditions of risk and uncertainty. It seeks to determine “How we know and why we act.”
The underlying assumption of business behavioral theory is that there is a psychology of running a business, and a measurable model of psychological motivational leadership.
One of the earlier discoveries in the field of behavioral theory that is still applied today in the field of motivational leadership is the Hawthorne Effect. The effect is a measurable improvement in output when the employer shows concern for employees. There is a value and benefit for the employer to acknowledge and provide for the psychological needs of the workers.
An important aspect of behavioral theory is the recognition that definable and learnable management behaviors exist. To determine effective behaviors one does not seek to define character or traits of good leaders. Instead one observes and applies what these leaders actually do. Such determinations represent the most fundamental application of behavioral theory to business practice.