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Summary - Financial Management 352
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Summary of Fin Man 352 done in 2023.
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CHAPTER 3, THEORY BUILDING:A formal, logical testable explana4on of some events that includes explana4ons of how things relate to one another
Model of reality, a simplifica4on that helps us be=er understand the logic and rela4onships among different factors
Can be built through a process of reviewing previous findings of similar studies, simple logical deduc4on, knowledge
of applicable theore4cal areas
GOALS OF THEORY:
o Gain a be=er understanding of the environment and rela4onship among various phenomena
o Predict behaviour of one phenomenon from the knowledge of another phenomenon
RESEARCH CONCEPTS, CONSTRUCTS, PROPOSITIONS, VARIABLES, AND HYPOTHESES:
Concept/construct is a generalized idea about a class of objects, a=ributes, occurrences, or processes that has been
given a name
Concepts are the building blocks of theory
Concepts abstract reality – concepts express in words various event/objects
Ladder of abstrac4on: organiza4on of concepts in sequence from the most concrete and individual
to the most general
Abstract level: in theory development, the level of knowledge expressing a concept that
exists only as an idea or a quality apart from an object
Empirical level: level of knowledge that is verifiable by experience/observa4on
Latent construct: a concept that is not directly observable or measurable, but can be
es4mated through proxy measures
e.g. risk aversion
Proposi4ons: statements explaining the logical linkage among certain concepts by asser4ng
a universal connec4on between concepts. Could be quite general and not
really testable in its current form
Hypothesis: formal statement of an unproven proposi4on that is empirically testable
Should be wri=en in a manner that can be supported or shown to be wrong
through an empirical test
Supported vs not supported
Empirical tes4ng: examining a research hypothesis against reality using data
Variables: anything that may assume different numerical values; the empirical
assessment of a concept
Opera4onalizing: the process of iden4fying the actual measurement scales to assess the
variables of interest
THEORY BUILDING:
Deduc4ve reasoning: the logical process of deriving a conclusion about a specific instance based on
a known general premise or something known to be true
Induc4ve reasoning: the logical process of establishing a general proposi4on on the basis of
observa4on of par4cular facts
,SCIENTIFIC METHOD:
‘A set of prescribed procedures for establishing and connec4ng theore4cal statements about events, for analysing
empirical evidence, and for predic4ng events not yet unknown; techniques or procedures used to analyse empirical
evidence in an a=empt to confirm or disprove prior concep4ons.’
Steps involved in applica4on of scien4fic method:
1. Assessment of relevant exis4ng knowledge of a phenomenon
2. Formula4on of concepts and proposi4ons
3. Statement of hypotheses
4. Design of research to test the hypotheses
5. Acquisi4on of meaningful empirical data
6. Analysis and evalua4on of data
7. Proposal of an explana4on of the phenomenon and statement of new problems raised by the research
Logical statements encountered during research are broken down into six categories:
1. Statements of the problem
Might sound dumb or simply phrased, but be=er than taking a major wrong turn in the beginning by making a
conclusion
2. Hypotheses as to the cause of the problem
3. Experiments designed to test each hypothesis
Experiments only fail when it fails to adequately test the hypothesis in ques4on, not when it just fails to achieve
a predicted result
4. Predicted results of the experiments
5. Observed results of experiments
6. Conclusions from the results of experiments
RATIONAL CHOICE THEORY: George C. Homans
Principle that assumes that individuals always make prudent an logical decisions that provide them with the greatest
benefit or sa4sfac4on and that are in their highest self-interest
BOUNDED RATIONALITY THEORY: Herbert Simon (Nobel Laureate)
People are not always able to obtain all the informa4on they would need to make the best possible decision
PROSPECT THEORY: Kahneman and Tversky
People value gains and losses differently, and, will base decisions on perceived gains rather than perceived losses. If a
person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people
would choose the former – even when they achieve the same economic and result.
Losses have more emo4onal impact than an equivalent amount of gains
EXPECTED UTILITY THEORY:
‘be^ng preferences’ of people with regard to uncertain outcomes are represented by a func4on of the pay-outs and
the probabili4es of occurrence.’
Risk-averse when it comes to gains
Risk-seeking when it comes to losses
WHY IS IT IMPORTANT TO UNDERSTAND AND STUDY THE THEORIES CONDUCTING RESEARCH?
List all the reasons as to why it is important to study and understand the relevant theories prior to conduc4ng research
Clearly explain each of the reasons and where possible substan4ate with an example
QUESTIONS:
1. Why is theory important in research – specifically at the stage of discovering a research question?
2. What are all the elements that pertain to theory building?
3. What is the abstract world? Why is it important? And how does it interact with the empirical world when
trying to find the research problem?
4. What is the difference between propositions and hypothesis and how are each of these used in developing a
research problem through theory building?
5. What important theories can you find that will assist your process and the development of your research
question within or outside the field of financial literacy, identity, behaviour, decisions, socialisation, etc.?
,CHAPTER 4: BUSINESS RESEARCH PROCESS
Business research is the systema4c inves4ga4on into and study of materials and sources in order to establish facts and
reach new conclusions
Interpret, analyse, contract data into informa4on that delivers, decides, diagnoses
Research helps businesses make decisions, but isn’t a decision in itself
Research is NOT:
o Just informa4on gathering
o Just searching for hard-to-locate informa4on
o Rearranging or transpor4ng of facts from one loca4on to another. Research is interpreta4ng collected data,
not just representa4on
o A sales pitch
Researchers contribute to decision making by:
• Helping to be=er define the current situa4on
• Defining the firm – determining how consumers, compe4tors and employees view the firm
• Providing ideas for enhancing current business prac4ces
• Iden4fying new strategic direc4ons
• Tes4ng ideas that will assist in implemen4ng business strategies for the firm
• Examining how correct a certain business theory is in a given situa4on
Business opportunity: a situa4on that makes some poten4al compe44ve advantage possible
Business problem: a situa4on that makes some significant nega4ve consequence more likely
Symptoms: observables cues that serve as a signal of a problem because they are caused by that
problem. E.g. increased employee turnover
Decision making: process of developing and deciding among alterna4ve ways of resolving a problem or
choosing from among alterna4ve opportuni4es
Certainty: decision maker has all the informa4on needed to make an op4mal decision
Uncertainty: manager grasps the general nature of desired objec4ves, but the informa4on about
alterna4ves is incomplete
Need to spend addi4onal 4me to gather data that clarify the nature of a decision
Ambiguity the nature of the problem itself is unclear. Vague objec4ves and decision alterna4ves
are difficult to define.
TYPES OF BUSINESS RESEARCH:
Undertaken to reduce uncertainty and focus decision making
1. Exploratory
Conducted to clarify ambiguous situa0ons or discover ideas that may be poten4al business opportuni4es
Not intended to provide conclusive evidence from which to determine a par4cular course of ac4on
, Usually a first step, conducted with the expecta4on that addi4onal research will be needed to provide more
conclusive evidence
Formulate problems/opportuni4es
Establish priority for research
Develop hypotheses
Clarify concepts
Ohen used to guide and refine these subsequent research efforts
Useful in new product development
2. Descrip4ve
Describes characteris0cs of objects, people, groups, organiza4ons, environments; tries to paint a picture of a
given situa4on by addressing who, what, when, where, and how ques4ons
Conducted aher the researcher has gained a firm grasp of the situa4on being studied
Ohen helps describe market segments
Accuracy is important
Survey research typifies a descrip0ve study
Diagnos4c analysis seeks to diagnose reasons for business outcomes and focuses specifically on the beliefs
and feelings consumers have about and toward compe4ng products
Hypotheses tes0ng
Can some4mes provide an explana4on by diagnosing differences among compe4tors, does not provide direct
evidence of causality
Also test rela4onships, ‘paint a picture’
Conclusive
3. Casual
Allows causal inferences to be made; seeks to iden0fy cause-and-effect rela0onships
Something brings something else about or makes it happen
Other types of research are used as building blocks
Researchers need to have a good understanding of the phenomena being studied
Causal research designs can take long to implement and can be expensive as they ohen involve intricate
designs that can be very expensive
Conclusive
Steps:
• Establish the appropriate causal order/sequence of events
• Measure the concomitant varia4on between the presumed cause and presumed effect
• Examine the possibility of spuriousness by considering the presence of alterna4ve plausible causal
factors
Causal inference: a conclusion that when one thing happens, another specific thing will follow
Pieces of causal evidence:
3.1. Temporal sequence
Deals with the 4me order of events – cause must occur before the effect
3.2. Concomitant variance
Two events covary – vary systema4cally
When a change in the cause occurs, a change in the outcome is also observed
Correla4on coefficient
3.3. Nonspurious associa4on
Any covaria4on between a cause and an effect is true and not simply due to some variable
Spurious associa4on is one that is not true
Establishing evidence can be difficult
Third variable causes a significant drop in the correla4on between the cause and the effect which
makes causal inference difficult to support
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