EBQ2054 Research Methods for Economics

and Business
Week 2

Theory Building

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 LEARNING OUTCOMES
After studying this chapter, you should
Define the meaning of theory
Understand the goals of theory
Understand the terms concepts, propositions,
variables, and hypotheses
Discuss how theories are
developed/Deductive Reasoning and
Inductive reasoning
Understand the scientific method
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 What is a Theory?
Theory of Scientific Research
A coherent set of general propositions, used as basis
of explanation of the apparent relationships of
certain observed phenomena

A theory is a large body of interconnected

propositions about how some portion of the social
world operates. It is statement or set of statements
that explain and predict phenomena. It is a
statement of a relationship between two or more
events. The more powerful a theory is, the more
events can be explained by it.

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Define the meaning of theory: Theories are
simply models designed to help us better
understanding reality and to understand the
logic behind things we observed.

A theory is formal, logical, explanation of

some events that includes predictions of
how things relate to one another.

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Goals of Theory
Understanding the relationships among
various phenomena (different concepts)
Predicting (if we understand the relationships
among concepts, we can than predict what
will happen if we change one factor.

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Functions of theory
To summarize existing knowledge
To give insights into general rules of
behavior
To explain observed events and
relationships
To predict the occurrence of
unobserved events and relationships

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 Characteristics of a Sound
Theory
 Consistent with observed facts and with the
established body of knowledge

 Able to explain the observed facts relating to a

particular problem

 Provide means for its verification

 Stimulate new discoveries and indicate further areas

in need of investigation

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 Research Concepts and Constructs

• Research Concept (or construct)

– A generalized idea about a class of objects,
attributes, occurrences or process that has
been given a name; abstraction of reality that
is the basic unit of theory development.
Concepts are the building blocks of theory. In
organisational theory, leadership, productivity, and
moral are concepts to explain about the theory.
In the theory of finance, risk aversion and inflation
are frequently used concepts.

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 Research Concepts and Constructs

• Ladder of Abstraction
– Organization of concepts in sequence from the most concrete
and individual to the most general.
• Abstract Level
– The level of knowledge expressing a concept that exists only as
an idea or a quality apart from an object.
• Empirical Level
– The level of knowledge that is verifiable by experience or
observation.
• Latent Construct
– A concept that is not directly observable or measurable, but can
be estimated through proxy measures.

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EXHIBIT 3.1 A Ladder of Abstraction for Concepts

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EXHIBIT 3.2 Concepts are Abstractions of Reality

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 Research Propositions and
Hypotheses
• 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.
• Hypothesis
– Formal statement of an unproven proposition
that is empirically testable.
• Example: Giving employees one Friday off each month
will result in lower employee turnover.

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 Empirical Testing
• Empirical Testing
– Examining a research hypothesis against reality using
data.
• Variables
– Anything that may assume different numerical
values.
– The empirical assessment of a concept.
• Operationalizing
– The process of identifying the actual measurement
scales to asses the variables of interest.

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EXHIBIT 3.3 Hypotheses Are the Empirical Counterparts of Propositions

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EXHIBIT 3.4 A Basic Theory Explaining Voluntary Job Turnover

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 Theory Building
How a theory is generated or build?
Through a thought process: deductive and
inductive reasoning
• 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.
• Inductive Reasoning
– The logical process of establishing a general
proposition on the basis of observation of
particular facts. 3–16
 Deduction –testing theory

In logic, we often refer to the two broad methods of

reasoning as the deductive and inductive approaches.
Deductive reasoning works from general to specific.

 "top-down" approach.

Theory
Hypothesis

Observation
Confirmation

 begin with thinking up a theory about

our topic of interest. 3–17
 narrow down into more specific hypotheses that we
can test.
 narrow down even further when we collect
observations to address the hypotheses.
 test the hypotheses with specific data -- a
confirmation (or not) of our original theories.
For example, you wish to establish the reasons for
stock price changes in the equity capital market.
After studying the price changes patterns it appears
that there seems to be a relationship between price
and profit of a business. You develop a hypothesis
that equity stock price is more likely to be increased
when a firm increases profit. Use quantitative data to
verify the hypothesis.
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 Induction – building theory
Inductive reasoning works from specific observations to broader
generalisations and theories.
 "bottom up" approach Theory

Tentative Hypothesis

Pattern
Observation
 begin with specific observations and measures, begin to detect patterns
and regularities
 formulate some tentative hypotheses that we can explore,
 Finally end up developing some general conclusions or theories.

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Eg., you wish to establish the reasons for
increasing stock price of an industry in equity
capital market.

Understand better the nature of the problem.

collect qualitative data for analyse, may formulate
a theory: a relationship between absence and
relatively short period of employment.

Most social science research involves both

inductive and deductive reasoning processes at
some time in the project.
http://www.socialresearchmethods.net/kb/dedind.php

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 The Scientific Method
• Scientific Method
– A set of prescribed
procedures for establishing
and connecting theoretical
statements about events,
for analyzing empirical
evidence, and for
predicting events yet
unknown.
– Techniques or procedures
used to analyze empirical
evidence in an attempt to
confirm or disprove prior
conceptions.
• Suggested steps:
1. Assess relevant existing
knowledge of phenomenon
2. Formulate concepts and
propositions
3. State hypotheses
4. Design research to test the
hypotheses
5. Acquire empirical data
6. Analyze and evaluate data
7. Propose an explanation of
the phenomenon and state
new problems raised by the
research
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