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Home > Books > Accounting and Corporate Reporting - Today and Tomorrow

Accounting Choices in Corporate Financial Reporting: A Literature Review of Positive Accounting Theory

Submitted: December 22nd, 2016 Reviewed: April 3rd, 2017 Published: September 20th, 2017

DOI: 10.5772/intechopen.68962

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This chapter aims to put light on the positive accounting theory and related empirical studies and identify its broad contributions to the accounting research. Our objective is to provide a review of positive accounting literature in order to synthesize findings, identify areas of controversy in the literature, and evaluate critiques. Positive research in accounting started coming to prominence around the mid-1960s and had been a vector of paradigm shift within the financial accounting research in the 1970s and 1980s. The positive accounting theory is developed by Watts and Zimmerman and is based on work undertaken in economics and is heavily dependent on the efficient market hypothesis, the capital assets pricing model, and agency theory. The three key hypotheses are bonus plan hypothesis, debt hypothesis, and political cost hypothesis. Nevertheless, PAT has been subjected to severe and numerous criticisms from different perspectives, which are critiques on research methods, its theoretical foundations, its logic on economics' basis, and its reference to philosophy of science. PAT and its hypotheses will continue to be a rich field of empirical research and the basic questions that it raises are still relevant today.

• positive accounting theory
• accounting choice
• management compensation hypothesis
• debt hypothesis
• political cost hypothesis

Author Information

İdil kaya *.

• Galatasaray University, Istanbul, Turkey

*Address all correspondence to: [email protected]

1. Introduction

Academic studies on the factors that affect a firm's accounting choices triggered a paradigm change in accounting research, altering the nature of literature from prescriptive to predictive. The construct of the new paradigm was first articulated by Ross Watts and Jerold Zimmerman with the publication of their revolutionary articles in the Accounting Review —“Towards a Positive Theory of the Determination of Accounting Standards” in 1978 and “The Demand for and Supply of Accounting Theories: The Market for Excuses” in 1979.

The term “Positive Accounting Theory” has come to practise to refer to the accounting theory developed and named by Watts and Zimmerman. The authors seek to appreciate and explain the concept of economic consequences of the interests of managers and financial accounting and reporting. In other words, their major aim is to explain and predict why managers and accountants choose particular accounting methods in preference to others. Furthermore, they assert that firm's attributes, such as leverage and size, are predictive variables of the firm's accounting choice.

In fact, positive research in accounting started coming to prominence around the mid-1960s and had been a vector of paradigm shift within the financial accounting research in the 1970s and 1980s. The term “positive” refers to the theory that attempts to explain and make good predictions of particular phenomena. The positive accounting theory (PAT) relied in great part on work undertaken in economics and was heavily reliant on the efficient market hypothesis, the capital assets pricing model, and agency theory.

PAT has led to a large amount of empirical studies. Positive researchers empirically test their predictions around the bonus plan hypothesis, the debt covenant hypothesis, and the political cost hypothesis. These hypotheses can be used in two distinguished forms of positive accounting theory. The first form is the opportunistic form asserting that managers in electing accounting procedures react to maximize the wealth, and the second form is the efficiency form for good corporate governance.

PAT has been subjected to severe and numerous criticisms from different perspectives, which are critiques on research method, economics base, and reference to philosophy of science. It is said that PAT seeks to predict and explain why managers choose to adopt particular accounting methods in preference to others but says nothing as to which method a firm should use.

We believe that PAT and its hypotheses will continue to be a rich field of empirical research and the basic questions that it raises are still relevant today. This chapter aims to put light on the PAT and related empirical studies and identify its broad contributions to the accounting research. Our objective is to provide a review of extant literature in order to synthesize findings, identify areas of controversy in the literature, and evaluate critiques.

Our literature review is organized around ideas of PAT, its hypotheses, supporters and followers, and finally critiques of this theory. The remaining part of this chapter proceeds as follows: We first examine the forces that give rise to this theory. We then investigate its foundations using the works of Watts and Zimmerman. We describe how empirical studies added unique insights into its development. Some criticisms are evaluated. Finally, we outline and discuss the significant contribution of PAT to our understanding of corporate reporting practices. We conclude that this theory has generated several useful insights on managers' reporting decisions.

2. The paradigm change in accounting research: the origins of positive accounting theory

In this section, we examine the forces and the publications that had a major impact on the emergence of PAT. This theory is based on work undertaken in economics and is heavily dependent on the efficient market hypothesis, the capital assets pricing model, and agency theory.

Positive research began in early 1960s and opened a new era in accounting literature, using economic models and statistical processing in empirical studies. The first serious discussions and analyses of positive research on accounting emerged in late 1960s with the pioneering studies of Ball and Brown [ 1 ] and Beaver [ 2 ]. These two seminal publications provide significant evidence of the information content in accounting earnings announcements, i.e., the earnings reflect some of the information in security prices. They gave rise to a huge literature of capital markets research [ 3 ].

A significant number of academic publications investigated the determinants of the shift in paradigm from narrative to positive research. Major findings offered by these studies are as follows.

Research methodologies have been developed based on the “hypothesis formulating and testing” [ 4 , 5 ].

With the emergence of computers, large new databases of financial information would be readily accessible for researchers [ 4 , 6 ].

The concept of “economic consequences” has been investigated. This concept is defined by Zeff as “the impact of accounting reports on the decision-making behaviour of business, governments, and creditors” [ 7 , 8 ].

New academic journals have been established and they adopt the selection policy of empirical researches [ 9 ].

The development of behavioural science enabled to analyse managers' accounting choices [ 6 , 9 ].

Generous research grants have been provided to new generation of accounting researchers that applied empirical research methods [ 9 ].

It is said that two reports on US business education were the impetus for those changes [ 4 , 5 ]. In 1959, R.A. Gordon and James E. Howell published “Higher education for business” and Franck C. Pierson published “The education of American Business men”. The former report was commissioned by Ford Foundation and the latter by Carnegie Foundation. Besides their recommendations on teaching methods, these authors stressed the need to develop research based on the formulation and testing of the hypotheses. They also describe the resources necessary to advance the level of business studies.

Another significant explanation of the PAT's development is the strong influence of several academic works on positive economic theory, efficient markets hypothesis, CAPM, agency theory, and capital markets researches ( Table 1 ). Watts and Zimmerman aimed to develop an economic-based accounting theory and they advance an empirical methodology that focus on economics-based explanations and predictions of accounting practice. Boland and Gordon assert that this economic-based accounting theory is a combination of Milton Friedman's instrumentalism and Paul Samuelson's positivism [ 15 ]. They also add that Watts and Zimmerman practise the methodology as that of the Chicago School economists [ 6 , 15 ].

Table 1.

Academic literatures that were the impetus for PAT.

In 1976, the publication of Jensen and Merckling's article on agency theory had a major impact on PAT [ 14 ]. In agency theory, the firm is analysed as “a nexus of contracts” and this concept is accepted by positive accounting research. The contracts are produced with the aim of guarantee that all parties, acting in their own self-interest, are at the same time motivated towards maximizing the firm's value. PAT accentuates the function of accounting in reducing agency costs and its essential role in an efficient corporate governance structure [ 4 ].

3. The development of positive accounting theory

In this section, we examine the development of the PAT, the contribution of major works of Watts and Zimmerman, and the hypotheses of this theory.

The construct of PAT was first articulated by Watts and Zimmerman and popularized in their book: positive accounting theory [ 6 , 16 ]. Table 2 shows major works of Watts and Zimmerman in this issue. They adopted the label “positive” from the economics to distinguish accounting research aimed at understanding accounting from research directed at generating prescriptions. They investigated the role of accounting theory in determining accounting practice and build a theory intending to be a positive theory (Watts & Zimmerman, p. 274) [ 5 ], i.e.,

“a theory capable of explaining the factors determining the extant accounting literature, predicting how research will change as the underlying factors change, and explaining the role of theories in the determination of accounting standards. It is not normative or prescriptive”.

Table 2.

Major works of Watts and Zimmerman.

Watts and Zimmerman reviewed the theory and methodology of the economic-based literature in accounting in their prominent book dated 1986 [ 6 ]. In this book written and used for second year M.B.A and Ph.D. audience, the authors point the important role of efficient market hypothesis in accounting research; they use CAPM as the valuation method. They explain the methodology of the empirical studies in the development of the literature. They also provide analyses end syntheses on forecasting earnings, contracting process, compensation plans, debt contracts, political process, empirical tests of accounting choice, stock price tests of the theory, and the theory's application to auditing [ 6 ].

According to Watts and Zimmerman, the “property rights” theory adopted by positive accounting researchers assumes that the firm is a nexus of contracts between self-interested individuals. PAT highlighted the importance of contracting costs, including information, agency, bankruptcy, and lobbying costs [ 5 , 6 ].

In 1990, after more than a decade since the publication of 1978 and 1979 articles, the authors examined and evaluated the evolution and state of PAT and criticisms of positive accounting research in their article “Positive Accounting Theory: A Ten Year Perspective”, in the accounting review. They emphasized that their two pioneering papers contributed to a literature that has uncovered empirical regularities in accounting practice and they responded to most of the published critiques [ 5 ]. In evaluating the contribution of this article to the literature, Watts and Zimmerman asset that:

“The literature explains why accounting is used and provides a framework for predicting accounting choices. Choices are not made in terms of "better measurement" of some accounting construct, such as earnings. Choices are made in terms of individual objectives and the effects of accounting methods on the achievement of those objectives”.

Watts and Zimmerman identified three essential hypotheses. These are bonus plan hypothesis (or management compensation hypothesis), the debt/equity hypothesis (or debt hypothesis), and political cost hypothesis [ 5 ]. According to management compensation hypothesis, managers with bonus plans anchored to earnings are more likely to adopt accounting methods that increase current period's reported income. The debt hypothesis predicts that the higher the firm's debt/equity ratio, the more likely managers use accounting methods that increase earnings. As far as political costs hypothesis is concerned, it is assumed that if managers are under political scrutiny, they are likely to adopt accounting methods that reduce reported income [ 4 ].

4. Literature relating to the PAT

In this section, we examine the PAT literature. A considerable amount of literature has been published on PAT. Numerous empirical studies tested its hypotheses, provided important evidence, and contributed to the theory.

PAT literature focuses on management's motives for financial reporting choices, using economic models and statistical processing, when there are agency costs and information asymmetry. It attempts to explain and predict firm accounting choices as a part of the firm's overall need to minimize its cost of capital and other contracting costs, applying methods and techniques from economics. Opportunistic attitudes and behaviours of managers and their impacts on accounting policy choices have been investigated widely in positive research and this led to a rich body of empirical studies on earnings management. A wide range of the literature incorporates both ex ante contracting efficiency incentives with ex post redistributive effects. The methodology of this literature is the methodology of economics, finance, and science generally [ 5 ]. Table 3 provides an overview of these empirical researches and their research area.

Table 3.

Literature constructed on the PAT.

Beattie et al. state that this literature implicitly assumes that the market is inefficient and relies on bottom line accounting numbers and does not show interest in methods used to produce them [ 18 ]. According to Healy and Palepu (p. 419) [ 19 ],

”Empirical studies of positive accounting studies test whether managers make accounting method changes or accrual estimates to reduce the costs of violating bond covenants written in terms of accounting numbers, to increase the value of earnings-based bonuses under compensation contracts, or to reduce the likelihood of implicit or explicit taxes”.

On the other hand, Healy and Palepu assert that PAT studies generated several interesting empirical regularities regarding management accounting choice but there is ambiguity on the interpretation of this evidence [ 19 ].

5. Criticisms from different perspectives

In this section, we summarize and analyse the literature having critical comments on PAT. The literature developed since the first publication of Watts and Zimmerman articles in 1978.

PAT has been subject to a continuous and endless stream of criticisms since it first emerged in late 1970s. The critiques are from different perspectives. These are critiques related to its theoretical foundations, its logic on economics' basis, its research methods, and critiques on its reference to philosophy of science [ 15 , 35 ]. It has been defended that this theory is scientifically wrong and its predictions do not always hold. Christenson (p. 18) asserts that [ 36 ]:

“By arguing that their theories admit exceptions, Watts and Zimmerman condemn them as insignificant and useless”.

In an examination of PAT methodology with a critical look, Christenson argues that he prefers to use the name “the Rochester School” referring to authors' affiliation instead of PAT [ 36 ]. Furthermore, he asserts that this discipline should be denominated “sociology of accounting” since it is about describing, predicting, and explaining the behaviours of managers and accountants. Table 4 presents an overview of some criticisms.

Table 4.

Some criticisms of the PAT.

R. J. Chambers, preeminent normative theorist, criticises the PAT in an aggressive manner, begins his article with the so-called positive accounting theory and continue with the label “PA cult” referring to positive accounting theorists [ 37 ]. Chambers [ 37 ]asserts that:

“The verbal adornments of the cult — 'positive', 'empirical', 'scientific', 'economics based' and so on — its rituals, its congregations, its sanctions and its cohesion, drew a galaxy of followers into orbit about the Chicago-Rochester axis”.

The other major criticisms are as follows:

The theory does not provide prescription to improve accounting practice [ 4 , 40 ].

Its fundamental assumption that all action is driven by self-interest is flawy.

It focuses only in a single motive. Complex nature of shareholders and managers behaviour is not regarded in the analysis [ 4 , 38 ].

Measurements and proxies being used in its empirical researches have a simplistic nature [ 38 ].

The banking and global financial crisis in 2008 raised doubts on the efficient market hypothesis [ 4 ].

6. Conclusion

Positive research began in early 1960s and triggered a paradigm shift in accounting literature, using economic models and statistical processing in empirical studies. The PAT is developed by Watts and Zimmerman and is based on work undertaken in economics and is heavily dependent on the efficient market hypothesis, the capital assets pricing model and agency theory. Watts and Zimmerman founded Journal of Accounting and Economics in 1978. The three key hypotheses are bonus plan hypothesis, debt hypothesis, and political cost hypothesis.

Management compensation contracts, capital structure of the firm and its exposure to political scrutiny have been the main areas of researches that are concerned with explaining and predicting accounting practice. These three aspects of the theory-oriented main stream researches in accounting allowed accounting researchers to expand the boundaries of their studies to align with theories in the field of economics and management. Positive researchers introduced new rational from the economics literature to analyse the implications of the efficient market hypothesis for disclosure regulation, to investigate the stock price effects of changes in accounting procedures, and to study the variables that are related to contract political costs.

PAT has been also subjected to severe and numerous criticisms on its research methods, its theoretical foundations, its logic on economics' basis, and its reference to philosophy of science.

Acknowledgments

The author is grateful for the support provided by Galatasaray University Research Fund. [Grant number 16.102.002].

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Types of Literature Review

There are many types of literature review. The choice of a specific type depends on your research approach and design. The following types of literature review are the most popular in business studies:

Narrative literature review , also referred to as traditional literature review, critiques literature and summarizes the body of a literature. Narrative review also draws conclusions about the topic and identifies gaps or inconsistencies in a body of knowledge. You need to have a sufficiently focused research question to conduct a narrative literature review

Systematic literature review requires more rigorous and well-defined approach compared to most other types of literature review. Systematic literature review is comprehensive and details the timeframe within which the literature was selected. Systematic literature review can be divided into two categories: meta-analysis and meta-synthesis.

When you conduct meta-analysis you take findings from several studies on the same subject and analyze these using standardized statistical procedures. In meta-analysis patterns and relationships are detected and conclusions are drawn. Meta-analysis is associated with deductive research approach.

Meta-synthesis, on the other hand, is based on non-statistical techniques. This technique integrates, evaluates and interprets findings of multiple qualitative research studies. Meta-synthesis literature review is conducted usually when following inductive research approach.

Scoping literature review , as implied by its name is used to identify the scope or coverage of a body of literature on a given topic. It has been noted that “scoping reviews are useful for examining emerging evidence when it is still unclear what other, more specific questions can be posed and valuably addressed by a more precise systematic review.” [1] The main difference between systematic and scoping types of literature review is that, systematic literature review is conducted to find answer to more specific research questions, whereas scoping literature review is conducted to explore more general research question.

Argumentative literature review , as the name implies, examines literature selectively in order to support or refute an argument, deeply imbedded assumption, or philosophical problem already established in the literature. It should be noted that a potential for bias is a major shortcoming associated with argumentative literature review.

Integrative literature review reviews , critiques, and synthesizes secondary data about research topic in an integrated way such that new frameworks and perspectives on the topic are generated. If your research does not involve primary data collection and data analysis, then using integrative literature review will be your only option.

Theoretical literature review focuses on a pool of theory that has accumulated in regard to an issue, concept, theory, phenomena. Theoretical literature reviews play an instrumental role in establishing what theories already exist, the relationships between them, to what degree existing theories have been investigated, and to develop new hypotheses to be tested.

At the earlier parts of the literature review chapter, you need to specify the type of your literature review your chose and justify your choice. Your choice of a specific type of literature review should be based upon your research area, research problem and research methods.  Also, you can briefly discuss other most popular types of literature review mentioned above, to illustrate your awareness of them.

[1] Munn, A. et. al. (2018) “Systematic review or scoping review? Guidance for authors when choosing between a systematic or scoping review approach” BMC Medical Research Methodology

  John Dudovskiy

Literature Review: Home

• Traditional or narrative literature reviews
• Scoping Reviews
• Systematic literature reviews
• Annotated bibliography
• Keeping up to date with literature
• Finding a thesis
• Evaluating sources and critical appraisal of literature
• Managing and analysing your literature
• Further reading and resources

Literature Reviews for students and Researchers

This guide will help postgraduate students, higher degree research (HDR) candidates and researchers to understand the process of conducting and writing a literature review.

It will explain and discuss:

• the different types of literature reviews;
• how and where to search for literature;
• evaluation of sources and critical appraisal of literature;
• how to manage and analyse your literature

Links to additional resources will be provided for more detailed information.

This guide is not intended for undergraduate students completing assignment tasks. Generally, the literature review required for undergraduate study will not be as comprehensive as the literature review required by researchers and PhD candidates conducting original research.

The purpose or aim of the literature review

A literature review, as part of a thesis or for any other publication, should demonstrate your knowledge of the research which has been conducted in the past and should place your research in the context of this work. A thesis is an original and significant piece of work that adds to the body of knowledge in a particular field. A literature review can have a number of purposes within a thesis. These include:

• demonstrating and clarify your understanding of your field of research;
• identifying patterns and trends in the literature;
• identifying gaps in the literature and seek new lines of inquiry;
• identifying similarities and differences in previous research and place your work in perspective;
• justifying your own research;
• increasing your breadth of knowledge of your subject area;
• identifying seminal and influential published works in your field;
• identifying relevant journals, publishers and conferences to search;
• providing the intellectual context for your own work, enabling you to position your project relative to other work;
• identifying experts working in your field (a researcher network is a valuable resource);
• carrying on from where others have already reached

Randolph, J. J. (2009) A guide to writing the dissertation literature review . Practical Assessment Research & Evaluation. 14 (13) 1-13

Charles Sturt University Thesis guidelines, policies and resources

• Your Thesis - outlines the nature of a thesis and provides a thesis plan and overview ot the thesis.
• Literature Review Guidelines by the Office of Research Services and Graduate Studies
• Higher degree by research policy - is the policy set down by CSU and contains important information that all candidates should read.
• Schedule 3 - Requirements for Thesis  in the Higher Degree by Research Policy
• Bachelor (Honours) policy - Charles Sturt University policy

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• Sign up for the Research Bulletin or HDR Newsletter

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Other Guides you may find useful

• EndNote and Nvivo for Literature Review
• Systematic and systematic-like reviews
• Where to look for grey literature

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Chapter 4: Theory in Psychology

Using Theories in Psychological Research

Learning Objectives

• Explain how researchers in psychology test their theories, and give a concrete example.
• Explain how psychologists reevaluate theories in light of new results, including some of the complications involved.
• Describe several ways to incorporate theory into your own research.

We have now seen what theories are, what they are for, and the variety of forms that they take in psychological research. In this section we look more closely at how researchers actually use them. We begin with a general description of how researchers test and revise their theories, and we end with some practical advice for beginning researchers who want to incorporate theory into their research.

Theory Testing and Revision

The primary way that scientific researchers use theories is sometimes called the hypothetico-deductive method  (although this term is much more likely to be used by philosophers of science than by scientists themselves). A researcher begins with a set of phenomena and either constructs a theory to explain or interpret them or chooses an existing theory to work with. He or she then makes a prediction about some new phenomenon that should be observed if the theory is correct. Again, this prediction is called a hypothesis. The researcher then conducts an empirical study to test the hypothesis. Finally, he or she reevaluates the theory in light of the new results and revises it if necessary. This process is usually conceptualized as a cycle because the researcher can then derive a new hypothesis from the revised theory, conduct a new empirical study to test the hypothesis, and so on. As  Figure 4.4 shows, this approach meshes nicely with the model of scientific research in psychology presented earlier in the textbook—creating a more detailed model of “theoretically motivated” or “theory-driven” research.

As an example, let us return to Zajonc’s research on social facilitation and inhibition. He started with a somewhat contradictory pattern of results from the research literature. He then constructed his drive theory, according to which being watched by others while performing a task causes physiological arousal, which increases an organism’s tendency to make the dominant response. This theory predicts social facilitation for well-learned tasks and social inhibition for poorly learned tasks. He now had a theory that organized previous results in a meaningful way—but he still needed to test it. He hypothesized that if his theory was correct, he should observe that the presence of others improves performance in a simple laboratory task but inhibits performance in a difficult version of the very same laboratory task. To test this hypothesis, one of the studies he conducted used cockroaches as subjects (Zajonc, Heingartner, & Herman, 1969) [1] .The cockroaches ran either down a straight runway (an easy task for a cockroach) or through a cross-shaped maze (a difficult task for a cockroach) to escape into a dark chamber when a light was shined on them. They did this either while alone or in the presence of other cockroaches in clear plastic “audience boxes.” Zajonc found that cockroaches in the straight runway reached their goal more quickly in the presence of other cockroaches, but cockroaches in the cross-shaped maze reached their goal more slowly when they were in the presence of other cockroaches. Thus he confirmed his hypothesis and provided support for his drive theory. (Zajonc also showed that drive theory existed in humans (Zajonc & Sales, 1966) [2] in many other studies afterwards).

Constructing or Choosing a Theory

Along with generating research questions, constructing theories is one of the more creative parts of scientific research. But as with all creative activities, success requires preparation and hard work more than anything else. To construct a good theory, a researcher must know in detail about the phenomena of interest and about any existing theories based on a thorough review of the literature. The new theory must provide a coherent explanation or interpretation of the phenomena of interest and have some advantage over existing theories. It could be more formal and therefore more precise, broader in scope, more parsimonious, or it could take a new perspective or theoretical approach. If there is no existing theory, then almost any theory can be a step in the right direction.

As we have seen, formality, scope, and theoretical approach are determined in part by the nature of the phenomena to be interpreted. But the researcher’s interests and abilities play a role too. For example, constructing a theory that specifies the neural structures and processes underlying a set of phenomena requires specialized knowledge and experience in neuroscience (which most professional researchers would acquire at   university  and then graduate school). But again, many theories in psychology are relatively informal, narrow in scope, and expressed in terms that even a beginning researcher can understand and even use to construct his or her own new theory.

It is probably more common, however, for a researcher to start with a theory that was originally constructed by someone else—giving due credit to the originator of the theory. This  type of investigation  is another example of how researchers work collectively to advance scientific knowledge. Once they have identified an existing theory, they might derive a hypothesis from the theory and test it or modify the theory to account for some new phenomenon and then test the modified theory.

Deriving Hypotheses

Again, a hypothesis is a prediction about a new phenomenon that should be observed if a particular theory is accurate. Theories and hypotheses always have this  if-then  relationship. “ If   drive theory is correct,  then  cockroaches should run through a straight runway faster, and a branching runway more slowly, when other cockroaches are present.” Although hypotheses are usually expressed as statements, they can always be rephrased as questions. “Do cockroaches run through a straight runway faster when other cockroaches are present?” Thus deriving hypotheses from theories is an excellent way of generating interesting research questions.

But how do researchers derive hypotheses from theories? One way is to generate a research question using the techniques discussed in  Chapter 2 “Getting Started in Research”  and then ask whether any theory implies an answer to that question. For example, you might wonder whether expressive writing about positive experiences improves health as much as expressive writing about traumatic experiences. Although this  question  is an interesting one  on its own, you might then ask whether the habituation theory—the idea that expressive writing causes people to habituate to negative thoughts and feelings—implies an answer. In this case, it seems clear that if the habituation theory is correct, then expressive writing about positive experiences should not be effective because it would not cause people to habituate to negative thoughts and feelings. A second way to derive hypotheses from theories is to focus on some component of the theory that has not yet been directly observed. For example, a researcher could focus on the process of habituation—perhaps hypothesizing that people should show fewer signs of emotional distress with each new writing session.

Among the very best hypotheses are those that distinguish between competing theories. For example, Norbert Schwarz and his colleagues considered two theories of how people make judgments about themselves, such as how assertive they are (Schwarz et al., 1991) [3] .Both theories held that such judgments are based on relevant examples that people bring to mind. However, one theory was that people base their judgments on the  number  of examples they bring to mind and the other was that people base their judgments on how  easily  they bring those examples to mind. To test these theories, the researchers asked people to recall either six times when they were assertive (which is easy for most people) or 12 times (which is difficult for most people). Then they asked them to judge their own assertiveness. Note that the number-of-examples theory implies that people who recalled 12 examples should judge themselves to be more assertive because they recalled more examples, but the ease-of-examples theory implies that participants who recalled six examples should judge themselves as more assertive because recalling the examples was easier. Thus the two theories made opposite predictions so that only one of the predictions could be confirmed. The surprising result was that participants who recalled fewer examples judged themselves to be more assertive—providing particularly convincing evidence in favour of the ease-of-retrieval theory over the number-of-examples theory.

Evaluating and Revising Theories

If a hypothesis is confirmed in a systematic empirical study, then the theory has been strengthened. Not only did the theory make an accurate prediction, but there is now a new phenomenon that the theory accounts for. If a hypothesis is disconfirmed in a systematic empirical study, then the theory has been weakened. It made an inaccurate prediction, and there is now a new phenomenon that it does not account for.

Although this revision seems straightforward, there are some complications. First, confirming a hypothesis can strengthen a theory but it can never prove a theory. In fact, scientists tend to avoid the word “prove” when talking and writing about theories. One reason for this  avoidance  is that there may be other plausible theories that imply the same hypothesis, which means that confirming the hypothesis strengthens all those theories equally. A second reason is that it is always possible that another test of the hypothesis or a test of a new hypothesis derived from the theory will be disconfirmed. This  difficulty  is a version of the famous philosophical “problem of induction.” One cannot definitively prove a general principle (e.g., “All swans are white.”) just by observing confirming cases (e.g., white swans)—no matter how many. It is always possible that a disconfirming case (e.g., a black swan) will eventually come along. For these reasons, scientists tend to think of theories—even highly successful ones—as subject to revision based on new and unexpected observations.

A second complication has to do with what it means when a hypothesis is disconfirmed. According to the strictest version of the hypothetico-deductive method, disconfirming a hypothesis disproves the theory it was derived from. In formal logic, the premises “if  A  then  B ” and “not  B ” necessarily lead to the conclusion “not  A .” If  A  is the theory and  B  is the hypothesis (“if  A  then  B ”), then disconfirming the hypothesis (“not  B ”) must mean that the theory is incorrect (“not  A ”). In practice, however, scientists do not give up on their theories so easily. One reason is that one disconfirmed hypothesis could be a fluke or it could be the result of a faulty research design. Perhaps the researcher did not successfully manipulate the independent variable or measure the dependent variable. A disconfirmed hypothesis could also mean that some unstated but relatively minor assumption of the theory was not met. For example, if Zajonc had failed to find social facilitation in cockroaches, he could have concluded that drive theory is still correct but it applies only to animals with sufficiently complex nervous systems.

This practice does not mean that researchers are free to ignore disconfirmations of their theories. If they cannot improve their research designs or modify their theories to account for repeated disconfirmations, then they eventually abandon their theories and replace them with ones that are more successful.

Incorporating Theory Into Your Research

It should be clear from this chapter that theories are not just “icing on the cake” of scientific research; they are a basic ingredient. If you can understand and use them, you will be much more successful at reading and understanding the research literature, generating interesting research questions, and writing and conversing about research. Of course, your ability to understand and use theories will improve with practice. But there are several things that you can do to incorporate theory into your research right from the start.

The first thing is to distinguish the phenomena you are interested in from any theories of those phenomena. Beware especially of the tendency to “fuse” a phenomenon to a commonsense theory of it. For example, it might be tempting to describe the negative effect of cell phone usage on driving ability by saying, “Cell phone usage distracts people from driving.” Or it might be tempting to describe the positive effect of expressive writing on health by saying, “Dealing with your emotions through writing makes you healthier.” In both of these examples, however, a vague commonsense explanation (distraction, “dealing with” emotions) has been fused to the phenomenon itself. The problem is that this conflation gives the impression that the phenomenon has already been adequately explained and closes off further inquiry into precisely why or how it happens.

As another example, researcher Jerry Burger and his colleagues were interested in the phenomenon that people are more willing to comply with a simple request from someone with whom they are familiar rather than unfamiliar (Burger, Soroka, Gonzago, Murphy, & Somervell, 1999) [4] .A beginning researcher who is asked to explain why this phenomenon is the case might be at a complete loss or say something like, “Well, because they are  familiar  with them.” But digging just a bit deeper, Burger and his colleagues realized that there are several possible explanations. Among them are that complying with people we know creates positive feelings, that we anticipate needing something from them in the future, and that we like them more and follow an automatic rule that says to help people we like.

The next thing to do is turn to the research literature to identify existing theories of the phenomena you are interested in. Remember that there will usually be more than one plausible theory. Existing theories may be complementary or competing, but it is essential to know what they are. If there are no existing theories, you should come up with two or three of your own—even if they are informal and limited in scope. Then get in the habit of describing the phenomena you are interested in, followed by the two or three best theories of it. Do this process whether you are speaking or writing about your research. When asked what their research was about, for example, Burger and his colleagues could have said something like the following:

It’s about the fact that we’re more likely to comply with requests from people we know [the phenomenon]. This situation is interesting because it could be because it makes us feel good [Theory 1], because we think we might get something in return [Theory 2], or because we like them more and have an automatic tendency to comply with people we like [Theory 3].

At this point, you may be able to derive a hypothesis from one of the theories. At the very least, for each research question you generate, you should ask what each plausible theory implies about the answer to that question. If one of them implies a particular answer, then you may have an interesting hypothesis to test. Burger and colleagues, for example, asked what would happen if a request came from a stranger whom participants had sat next to only briefly, did not interact with, and had no expectation of interacting with in the future. They reasoned that if familiarity created liking, and liking increased people’s tendency to comply (Theory 3), then this situation should still result in increased rates of compliance (which it did). If the question is interesting but no theory implies an answer to it, this dearth might suggest that a new theory needs to be constructed or that existing theories need to be modified in some way. These would make excellent points of discussion in the introduction or discussion of an American Psychological Association (APA) style research report or research presentation.

When you do write your research report or plan your presentation, be aware that there are two basic ways that researchers usually include theory. The first is to raise a research question, answer that question by conducting a new study, and then offer one or more theories (usually more) to explain or interpret the results. This format works well for applied research questions and for research questions that existing theories do not address. The second way is to describe one or more existing theories, derive a hypothesis from one of those theories, test the hypothesis in a new study, and finally reevaluate the theory. This format works well when there is an existing theory that addresses the research question—especially if the resulting hypothesis is surprising or conflicts with a hypothesis derived from a different theory.

To use theories in your research will not only give you guidance in coming up with experiment ideas and possible projects, but it lends legitimacy to your work. Psychologists have been interested in a variety of human behaviours and have developed many theories along the way. Using established theories will help you break new ground as a researcher, not limit you from developing your own ideas.

Key Takeaways

• Working with theories is not “icing on the cake.” It is a basic ingredient of psychological research.
• Like other scientists, psychologists use the hypothetico-deductive method. They construct theories to explain or interpret phenomena (or work with existing theories), derive hypotheses from their theories, test the hypotheses, and then reevaluate the theories in light of the new results.
• There are several things that even beginning researchers can do to incorporate theory into their research. These include clearly distinguishing phenomena from theories, knowing about existing theories, constructing one’s own simple theories, using theories to make predictions about the answers to research questions, and incorporating theories into one’s writing and speaking.
• Practice: Find a recent empirical research report in a professional journal. Read the introduction and highlight in different colours descriptions of phenomena, theories, and hypotheses.
• Zajonc, R. B., Heingartner, A., & Herman, E. M. (1969). Social enhancement and impairment of performance in the cockroach.  Journal of Personality and Social Psychology, 13 , 83–92. ↵
• Zajonc, R.B. & Sales, S.M. (1966). Social facilitation of dominant and subordinate responses. Journal of Experimental Social Psychology, 2 , 160-168. ↵
• Schwarz, N., Bless, H., Strack, F., Klumpp, G., Rittenauer-Schatka, H., & Simons, A. (1991). Ease of retrieval as information: Another look at the availability heuristic.  Journal of Personality and Social Psychology, 61 , 195–202. ↵
• Burger, J. M., Soroka, S., Gonzago, K., Murphy, E., & Somervell, E. (1999). The effect of fleeting attraction on compliance to requests.  Personality and Social Psychology Bulletin, 27 , 1578–1586. ↵

Primary way that scientific researchers use theories.

Research Methods in Psychology - 2nd Canadian Edition by Paul C. Price, Rajiv Jhangiani, & I-Chant A. Chiang is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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