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02 - ARME - Topic2 - Theory Building - MSK

lecture

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10 views15 pages

02 - ARME - Topic2 - Theory Building - MSK

lecture

Uploaded by

charlie tuna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 3:

Theory Building
What is Theory?
• Theories are simply generalizations that help
understand reality in a better manner.

• A formal, logical explanation of some events


that includes predictions of how things relate
to one another.
– Built through a process of reviewing previous
findings of similar studies,
– simple logical deduction, and/or
– knowledge of applicable theoretical areas.
2
Goals of Theory
• Two basic purposes-
– Understanding: Allows the theorist to gain a
better understanding of the relationship among
various phenomena.
• For example, aged investors are more prone to income
generating investment than younger investors.
– Prediction: Allows to predict the behavior of one
phenomenon from the knowledge of another
phenomenon.
• Understanding and prediction go hand in
hand.
3
Theory Development

• Theory development is a process of describing


phenomena at increasingly higher levels of
abstraction, and
• Eventually abstract concepts need to be linked
to observed reality.
• Related Terminology will come to aid in doing
so.

4
Theory Development (cont’d)

Theory operate at TWO levels:


• Abstract level: In theory development, the level of
knowledge expressing a concept that exists only as
an idea apart from an object. i.e. job performance
– Concepts
– Propositions
• Empirical level: Level of knowledge reflecting that
which is verifiable by experience or observation.
– Variables
– Hypotheses
5
Theory Development (cont’d)
EXHIBIT 3.2 Concepts are Abstractions of Reality

6
Theory Development (cont’d)
• Concept (or Construct): A generalized idea about a
class of objects, attributes, occurrences, or processes
that has been given a name.
– “leadership”, “productivity”, and “morale”
– “gross national product”, “risk aversion”, and “inflation”

• Propositions: Statements explaining the logical linkage


among certain concepts by asserting a universal connection
between concepts.
• Example: Treating employees better will make them more loyal
employees.
7
Theory Development (cont’d)
• Hypothesis: Formal statement of an unproven
proposition that is empirically testable.
– Example: Giving employees one Sunday off each month
will result in lower employee turnover.

• Variables: Anything that may assume different numerical


values.
– Example: Sales, Net Income, Total Assets, GDP, Inflation etc.

8
Theory Development (cont’d)
EXHIBIT 3.3 Hypotheses Are the Empirical Counterparts of Propositions

9
Theory Building:
Inductive vs. Deductive Reasoning

10
Inductive vs. Deductive Reasoning (cont’d)
• Deductive Reasoning
– The logical process of deriving a conclusion about a
specific instance based on a known general premise or
something known to be true.
– Top-down approach

• Inductive Reasoning
– The logical process of establishing a general proposition on
the basis of observation of particular facts.
– Bottom-Up approach

11
Inductive vs. Deductive Reasoning (cont’d)

12
Inductive vs. Deductive Reasoning (cont’d)
Examples of Deduction:

Examples of Induction:

13
Practical Value of Theory

• Theories often guide research


• Theories become confirmed over time through
testing
• Managerial business strategy then becomes guided
by the theories that are verified through research.
– Efficient Market Hypothesis
– Adverse Selection and the Lemons Problem
– Moral Hazard

14
Thank You!!!

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