What is a Theory?

What is a Theory?

By Kelly Stallard 

kelly dot stallard at bigpond dot com

A theory can be defined as:

‘A coherent set of hypothetical conceptual and pragmatic principles forming the general framework of reference for a field of inquiry’- Hendriksen, 1970 p.1

In other words, a theory is much more than a 'hunch' or a 'gut feeling'. It is based on logical reasoning and used to help make sense of real world phenomena, providing explanations as to why some things work the way they do (Deegan, 2009 p.4).

Logic is the valid reasoning behind the theory, to show that it makes sense.  A theory also requires proof and evidence, but we must be careful not to confuse proof with evidence. Evidence is something that you show or present to support your argument, whereas proof is that one ‘thing’, be it evidence, an argument, or something else that convinces you the theory is the truth.

The following elements must be present in order to construct a theory: It must be structured, form a framework which leads to other things, be a conceptual model (show relationships) explaining what the 'real world' is and ultimately help us make decisions.

It is also beneficial, but not necessary, if the theory is useful (helpful in the real world), prescriptive (whether good or bad), able to criticise current methods, fits with existing ideas, is true in all circumstances, is exact and realistic.

Critical Thinking and Theory

It is important when evaluating a theory to think carefully about what has been presented to you and not just accept it as truth. In other words, are the supporting arguments logical, do you agree with the assumptions of the theory and is there acceptable evidence to support the theory. This is where critical thinking comes into play, enabling people to think ‘outside the box’ and to look at things in different ways. Critical thinking is governed by things such as clarity, precision, accuracy, relevance and consistency (Bassham et al, 2009 p.2)
Clarity is required to make sure we understand what we are being told both through language and through thoughts or ideas. Critical thinkers also value precision, looking for precise (or exact) answers to precise questions. Accuracy and relevance are also important as decisions that are based on bad information will lead to bad decisions. Staying focused on what is relevant will help ensure accuracy (Bassham et al, 2013 p.2).

Finally, there is a need for consistency in critical thinking. If a person holds inconsistent beliefs, how can they both be true? Inconsistencies can be logical – saying or believing inconsistent things or; practical - saying one thing yet doing another. Critical thinkers consider all these aspects when assessing a theory, in order to avoid fallacies.

Fallacies are misleading arguments or theories that are seductive and easy to believe. The two main types of fallacies to be aware of are fallacies of relevance and fallacies of evidence. Fallacies of relevance are statements whose purpose is to draw attention away from the subject matter. Fallacies of evidence relate to arguments that do not provide the required factual evidence for their conclusions (Bassham et al, 2013 p.4).

Perspectives of Accounting

There are theories can be divided into roughly two categories; Positive and Normative. Although there are additional types, these are the most common. Both are constructed in different ways and have their own objectives so users have to be careful not judge a normative theory as being "bad" if it is approached from a positive perspective.

Positive theories describe and predict. They aim to explain how things work by using a more scientific approach, so as to understand ‘why’. These theories tell us what 'is' and are based on facts.
Normative theories are prescriptive and tell us what 'should' be, more like providing instructions. These theories tend to start with morals and are based on judgements of what is good and bad or right and wrong.
Theories are constructed from a number of arguments. Each argument can then be proved (or disproved) by using either inductive or deductive reasoning.

Image by Kelly Stallard

Inductive reasoning is generally associated with positive theories that have been developed using empirical evidence - evidence based on past observations. Inductive reasoning begins with specific observations and uses these to detect patterns thus enabling a hypothesis to be formed. This hypothesis offers explanations as to why things are done in a certain way and this in turn leads to the creation of a general theory.



Deductive reasoning however often starts with a normative idea. It begins with a tentative theory that is used to form a hypothesis, explaining what should be done. These hypotheses provide evidence through testing and observations, leading to a confirmed theory. 

Image by Kelly Stallard

Deductive reasoning is often considered the stronger of the two methods. This is because from each argument, the following inference must be true to confirm the theory, whereas inductive reasoning only implies the truth. Reasoning, Logic and Proof are all required when evaluating the strength of a theory.

Parts of a Theory

A theory can essentially be broken down into four main parts: Evidence, Inference (or conclusion), Assumptions and Arguments.

Evidence can be facts, other theories, observations, and so on that you present to support your argument.
Inference / Conclusions are the resulting explanations based on an argument and supported by evidence.
Assumptions can be explicit or implicit. Explicit assumptions are clearly and precisely stated, leaving no room for implication. The assumption may include arguments based on a persons unconscious thoughts, which could affect the conclusion. For example, this is what I believe so this is my argument supporting that belief.
Implicit assumptions include the underlying agreements or statements made in the development of an argument, which are not explicitly voiced nor necessarily understood. That is, they are implied but not directly stated.

Arguments are the fragments (pieces) that build to the conclusion. Arguments are ALWAYS statements. To test whether some thing is a statement, put "it is true that" at the beginning of the sentence. If it still makes sense, then it is a statement.  A simple example of an argument could be:

1. All people are selfish (Explicit assumption)
2. Managers are paid bonuses on profits made (Argument)
3. Therefore old managers will not spend money on research and development (Conclusion)

Another way of understanding how a theory is constructed, is by looking at it from a different perspective. Imagine building a house and picture each part of the theory as one aspect of the build. For example, we start with assumptions – the foundation on which we want to build. Next, the theory itself forms the solid structure on which to base our arguments. The arguments and evidence are the parts and materials used to build on the structure. Finally, the finished product of a house is the conclusion to the theory – what it was designed to do. The below link shows this process in pictures as a visual aid to help understand how the process all fits together.

References

Bassham, G Irwin, W Nardone, H Wallace, JM 2013, Critical Thinking: A student's Introduction, 5th Edition, McGraw-Hill, New YorkDeegan, C 2009, Financial Accounting Theory, 3rd Edition, McGraw-HIll Australia Pty Ltd, NSW

Hendriksen, E 1970, Accounting Theory, Illinois, Richard D Irwin