Sunday, September 11, 2016

Deductive Theory Building and Inductive Theory Building

Developing Theory from Observations - Creativity in Inductive Thinking - Research Methodology

Scientific Research is theory building.

Theory is developed for the set of observations. The process involved is inductive thinking. There is creativity involved in theory building. The concrete or specific observations are to be described by general concepts. Theory connects the concepts.

In developing the concept from a practical instance or observation some assumptions are employed and a rigorous description of the concept is developed. Further assumptions are used to develop theory. Model building is also theory development only. Model building used to solve practical problems also involves assumptions that bring the reality to close to the existing problem solving theories. From the set of assumptions, the theory is developed. This is termed as deductive approach to theory building.

In grounded theory method, Glaser and Strauss recommend theory building from the evidence only without building any model and then developing theory. They criticize model based theory building as too distant from the evidence on which it was supposed to be based. Hence, the likelihood of the theory failing in test is high.

Illustrations of Assumptions and Theory Building

Modigliani and Miller Capital Structure Theory


1. Perfect capital market: Information is freely available, there is no asymmetry, transactions are costless; there are no bankruptcy costs, securities are infinitely divisible.
2. Rational Investors and Managers: Investors rationally choose a combination of risk and return that is most advantageous to them. Managers act in the interests of shareholders.
3. Homogeneous expectations: Investors hold identical expecations about future operating earnings.
4. Equivalent risk classes: Firms can be grouped into 'equivalent risk classes' on the basis of their business risk.
5. Absence of Taxes: There is no corporate income tax.

MM Proposition I
The value of a firm is equal to its expected operating income divided by the discount rate appropriate to its risk class. It is independent of its capital structure.

MM Proposition II
The expected return on equity is equal to the expected rate of return on assets, plus a premium. The premium is equal to the debt-equity ratio times the difference between the expected return on assets and the expected return on debt.

(Source: Prasanna Chandra, Financial Management: Theory and Practice, Fifth Edition, Tata McGraw-Hill Pub. Co. Ltd, New Delhi, 2001. pp.417-24.)

Theory of Collisions (Physics)


The masses are moving on a frictionless surface.
The masses are perfectly elastic bodies (or they are connected by massless springs).

(Reference: H.C. Verma, Concepts of Physics Part 1, Bharati Bhawan, New Delhi, 1993 (Second reprint of revised edition 2007), p.145.

Article originally published at Knol 2657

List of Articles on the Topic

Volume 14, No. 1, Art. 25 – January 2013
Theory Building in Qualitative Research: Reconsidering the Problem of Induction

Pedro F. Bendassolli

Abstract: The problem of induction refers to the difficulties involved in the process of justifying experience-based scientific conclusions. More specifically, inductive reasoning assumes a leap from singular observational statements to general theoretical statements. It calls into question the role of empirical evidence in the theory-building process. In the philosophy of science, the validity of inductive reasoning has been severely questioned since at least the writings of David HUME. At the same time, induction has been lauded as one of the main pillars of qualitative research methods, and its identity as such has consolidated to the detriment of hypothetical-deductive methods. This article proposes reviving discussion on the problem of induction in qualitative research. It is argued that qualitative methods inherit many of the tensions intrinsic to inductive reasoning, such as those between the demands of empiricism and of formal scientific explanation, suggesting the need to reconsider the role of theory in qualitative research.

Full paper available

Updated   14 September 2016,  24 August 2016,  10 December 2012


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