Why hard-nosed executives should care about management theory

Theory often gets a bum rap among managers because it's associated with the word "theoretical," which connotes "impractical." But it shouldn't. Because experience is solely about the past, solid theories are the only way managers can plan future actions with any degree of confidence. The key word here is "solid." Gravity is a solid theory. As such, it lets us predict that if we step off a cliff we will fall, without actually having to do so. But business literature is replete with theories that don't seem to work in practice or actually contradict each other. How can a manager tell a good business theory from a bad one? The first step is understanding how good theories are built. They develop in three stages: gathering data, organizing it into categories highlighting significant differences, then making generalizations explaining what causes what, under which circumstances. For instance, professor Ananth Raman and his colleagues collected data showing that bar code-scanning systems generated notoriously inaccurate inventory records. These observations led them to classify the types of errors the scanning systems produced and the types of shops in which those errors most often occurred. Recently, some of Raman's doctoral students have worked as clerks to see exactly what kinds of behavior cause the errors. From this foundation, a solid theory predicting under which circumstances bar code systems work, and don't work, is beginning to emerge. Once we forgo one-size-fits-all explanations and insist that a theory describes the circumstances under which it does and doesn't work, we can bring predictable success to the world of management.     

A RE-EXAMINATION OF THE PROXY HYPOTHESIS

In this study we examine whether the proxy hypothesis can explain the puzzling negative relation between real stock returns and expected inflation. Our study improves upon previous tests that suffer from model misspecification and are incomplete. With correctly specified models, we provide a comprehensive test using data from four major industrialized nations during the period of floating exchange rates. Results do not support the proxy hypothesis.