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Derivatives -- Perceptions of Value and Use
Realistic & Empirical Research Approaches in Finance
Empirical research (which originates from the positivist tradition) and qualitative research are sufficiently distinct in their philosophical grounding to ask very different types of research questions. Empirical research is a theory-building endeavor that seeks to add to theory by determining the degree to which the hypotheses in a study are true or false. Qualitative research does not begin with theory, as the researcher is interested in the "truth" that is inherent in subjective accounts and perceptions about phenomena. Several types of qualitative research exist, each with a tendency toward a particular methodology. For example, ethnography is often naturalistic research in which the presence of the investigator is a functional "instrument" in the research. Empirical research imposes great constraints on the capacity of the investigator to in any way influence the data or the experimental process, unless such action is a scientifically presented variable. Realistic research is applied research that is inextricably part of the context in which it occurs. An example of realistic research is action research in which an inquiry takes place solely for the purpose of solving a practical problem -- any theory is secondary to the problem solving.
The point that Ahmad Juma'h makes in the article Empirical and Realistic Approaches of Research is that researchers exposed to multiple theories of action and theories of knowledge appreciate the limiting effect of permitting a single approach to inquiry to dominate a research endeavor. In the manner of researchers who exercise linguistic objectivity and epistemic objectivity, it is evident that a research frame can lead to a search for "truth" without insistence on an exclusive or distinctive philosophical grounding. The key point of departure for inquiry from its philosophical origins lies in what Juma'h (2006, p. 106) refers to as the research question: "What does 'p' mean?" This, rather than the epistemological question, "How do we know 'p?'" By extension, empirical inquiry is intentional about determining if, according to the prevailing theory, the research findings about 'p' are true. A realistic inquiry emphasizes research findings that illustrate how 'p' may be applied.
The word epistemology has its origins in the Greek word episteme, or knowledge. Epistemology is the philosophy of knowledge or, in the simplest terms, how we come to know what we know (Trochim, 2006). Methodological approaches are concerned with the specific ways, or methods, which researchers use to understand what they study -- and ultimately better comprehend the world (Trochim, 2006). The constructs of research methodologies and epistemology are integrally related. Epistemology is the philosophy of how humans can / come to know anything, and methodology is the practice conducted so as to enable knowledge (Trochim, 2006).
In a complete discussion of research methods -- particularly positivism or empiricism -- it is important to recognize that scientific research approaches (positivism and empiricism fall into this broader category) is at a very fundamental level a rejection of metaphysic (Trochim, 2006). If it is to be distinguished from positivism at all, empiricism is "the idea that observation and measurement was the core of the scientific endeavor" (Trochim, 2006). Metaphysics is a branch of philosophy that studies the nature of being and existence, of beings, causality, and time and space. A foundational tenet of metaphysics is that knowledge can be acquired about these types of phenomenon that do not lend themselves to observation and measurement. In this way, particularly, positivism departs from metaphysics, holding to a concept of knowledge that purports to describe the phenomena that humans can and do experience. That is, the purpose of scientific endeavor is to describe and report on what can be observed and systematically measured. Positivist (and logical positivists) hold that attempts to gain knowledge outside of these constructs is not possible. The pivotal point of a positivist approach is that scientific methods are "the way to get at truth, to understand the world well enough so that we might predict and control it" (Trochim, 2006). That this is so, according to positivism (empiricism) is due to the fact that the world -- the entire universe -- operates under laws of cause and effect that are discernable, given applicable and sufficiently robust scientific methods (Trochim, 2006). In this manner, science can be viewed as tool -- a mechanistic set of practices -- that is used for theory building (Trochim, 2006). Through disciplined deductive reasoning, scientists postulate theories that they then put to the test through rigorous scientific methods involving direct manipulation, repeated measures, and observation. Scientific research informs theory according to how well the data from research supports or contradicts a given theory, and indicates the direction that the theory may need to be revised in order to better predict reality.
This paper will examine the aims and purposes of positivist (empirical) research and realistic (applied research). The discussion will then examine the ongoing research debate about preferred methodologies and approaches to research design in the field of finance, looking specifically at the perceptions of investors toward use of derivatives and their assessment of managers who employ the use of derivatives. Finally, the influence of generalization on research conducted in the field of finance is discussed.
Positivist research approach. The positivist approach to research imposes a structure for conducting research and a frame for thinking, both of which contribute to a particular form of theory. The theory of knowledge that undergirds positivism permits contributions to the literature that are empirical in nature, having been gathered through actual experience. To this structure, logical positivism adds analysis and mathematical techniques, such as those used for model building. The aim of positivism is to add to a theory of meaning (a corpus of literature that supports the "truthfulness" of a theoretical foundation). The platform of logical positivism is that a proposition must be verified through an established empirical (evidence-based) method that permits a the determination of the truthfulness or falsity of the proposition or phenomenon.
Realistic research approach. A realistic approach to understanding the world emphasizes knowledge about the mechanisms of naturally occurring phenomena, the interaction and combination of which contribute to continual change. Realists consider the construction of knowledge to be a social activity that is inextricably related to the context in which phenomena occur. In other words, to the realists, knowledge is not a product or outcome that can be known simply through observation without also considering its application in social science.
II. The Research Approach Debate
According to Gippel (2012), the last four decades of mainstream financial research have been grounded in "the neoclassical rational expectations paradigm" (p. 143). However, in his 1953 essay, The Methodology of Positive Economics, Milton Friedman argued for the field to move past a desire for descriptive realism, and instead utilize theory for "organized reasoning and analysis" rather than seek "concrete truth" (Hammes, 2011, p. 402).
Gippel examines several emerging sub-disciplines of finance that are departures from the neoclassical rational expectations paradigm. Gippel (2012) describes behavioral finance as the most well established challenge to the old paradigm, noting that evidence supporting behavioral finance has come primarily from experimental methods that depart from the traditional mathematical modeling of rational expectations. Birou et al. (2011) provide an example of realist research that is grounded in epistemology and other organization research for the purpose of managing tacit or applied knowledge.
Investors' Perception of Financial Derivatives. Using empirical methods and inductive reasoning, Koonce, et al. (2007) studied the perceptions of investors with regard to their money managers use of derivatives, and found that overall investors tend to reward asset management firms that use derivatives and regard these managers as taking a higher level of care than asset managers who do not use derivatives. It is important to note that Koonce et al. (2007) conducted their research prior to the fiscal crisis, an event that could substantially alter the findings of a replication study. This point underscores the substantive contribution of context to theory building and is a perspective endorsed by the realism approach. Indeed, Koonce et al. (2007) found that "how investors think about derivatives in hindsight is different from how they judge them in foresight" (p. 595).
Pennings & Garcia (2002) take a different tack, examining the relation between the heterogeneous characteristics of money managers and derivative usage in small and medium-sized enterprises (SMEs). Using an inductive reasoning in an empirical research approach that utilized a generalized linear regression model, Pennings & Garcia (2002) studied the psychological construct of risk attitude within the context specific to the decision-making. The researchers measured the risk attitudes of money managers under experimental conditions that closely resembled their quotidian work environment and thereby could reasonably be associated with the occurrence of hedging behavior (Pennings & Garia, 2002).
In their empirical research study, Zheng, et al. (2011) used a Heckman regression model to examine the relation between five categories of variables and the use of future trading and hedging ratios. Inductive data was collected through face-to-face interviews during which questionnaires were administered (Zheng,…[continue]
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