Michael D. Ryall and Olav Sorenson
Most research on organizations presumes that leaders can direct their organizations towards a set of goals, but that ability requires leaders to understand the consequences of their actions, a problem of causal inference. To explore this problem, we develop a formal model of the organization as a system of causal relationships. Managers observe some elements of this system but not others. Hidden (unseen) elements can bias managers’ assessments of the expected consequences of their actions, but they only do so under a specific set of conditions. Absent those conditions, simple and even incomplete theories prove sufficient for accurate assessments. Interestingly, the specificity of the problematic conditions also suggests several ways in which organization design could eliminate them. We introduce three types of organizational solutions to the problem of causal inference in the presence of hidden influences — experimentation, illumination, and substitution — and discuss how a variety of organizational design features might enact them.