Popper’s Methodology of Falsificationism and Accounting Research Ruth D. Hines The Accounting Review, Vol. 63, No. 4 (Oct., 1988), 657-662. Stable URL: hutp//links jstor.org/sici?sici=0001-4826%28 1988 10% 2963 3A4%3C657%3APMOFAA%3E2,0,CO%3B2-D The Accounting Review is currently published by American Accounting Association, ‘Your use of the ISTOR archive indicates your acceptance of JSTOR’s Terms and Conditions of Use, available at hhup:/www.jstororg/about/terms.hml. JSTOR’s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at hup:/www jstor-org/journals/aaasoc. uml Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the sereen or printed page of such transmission, STOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals, For more information regarding JSTOR, please contact support @jstor.org. upslwww jstor.org/ ei Jun 18 00:26:42 2004Popper’s Methodology of Falsificatio: nism and Accounting Research Ruth D. Hines ABSTRACT: Poppers falsficationism is apparently being adopted as an ideal by accounting researchers. For example, Christenson [1983] hes criticized Watts and Zimmerman’s 11978, 1978) theories for not conforming to Popper's approach. This paper argues that Popper's fal- sificationism should not be viewed as an attainable ideal by accounting researchers, and that standard of rigor and research and experimental design are sufficient to support Christenson’s criticisms without recourse to Popper's methodology. joppeR’s [1959] falsificationist meth- solve a particular logical problem. The problem is that observations which are in accordance with a theory cannot be taken to “confirm” or “prove” that theory. Accepting a theory because of the existence of confirming evidence commits the fallacy of “affirming the consequent” and is a well-recognized error of logic.’ Popper's approach de- pends upon the point that the falsity of universal statements can be logi- cally deduced from singular statements, Therefore, Popper prescribed that the- ories be negatively framed: theories should state the type of observation(s) that refute them (and, hence, would be decisive observations), rather than posi- tively state those observations which would support or confirm them. The strength of Popper's falsificationist ap- proach derives from the fact that, while it is logically fallacious to affirm the con- sequent, it is logically correct to deny the consequent (the logical rule of modus tollens). ‘The view that Popper's falsificationist 657 Hume [1865 first articulated the major problem that ‘this point of loge presents for empiricism. An associat Gefitiency of conftmationsm or verificationism, fur- ther rendering it an extremely weak form of testns, telats to the fact that every false statement has ani Gefiite number of factually correct consequences. Thus, there will always be many observations available 10 support a fase theory. For example, prior to Einseinian theory, everything in the observable world seemed 10 confirm Newtonian theory. In fact, as Leibniz [1677] showed, it an be logically demonstrated, that any finite ‘number of observations canbe accommodated within a indefinitely large number of diferent explanations. As katos [1978, p. 8] states: “Creative imagination is likely to find corroborating novel evidence even forthe ‘most “absurd” programme, ifthe search as sufficient drive.” ‘The author gratefully acknowledges the helpful com- ments on previous versions of this paper of Charles CCrstenson, the anonymous feviewers, George Foster ‘and participants in a Macquatie University Workshop in ‘Accounting and Financial Management. The author has ‘also benefited from the comments of Bob McLaughlin. ‘and participation in his seminars in Philosophy of Sei- ‘ence at Macquarie Universiy. Ruth D. Hines is Senior Lecturer in Ac- counting and Financial Management at Macquarie University. ‘Manuscript received November 1988. Revisions received June 1986, August 1987, Aprit 1988, and July 198, ‘Accepted May 1988658 methodology represents a scientific ideal appears to be gaining popularity with accounting researchers. For example, McKee et al. (1984, pp. 647, 651-652] and Watts and Zimmerman (1986, pp. 2, 8-10, 12] make favorable references to Popper. Recently, Christenson has based a critique of work on the positive ac- ‘counting theory of the Rochester School on its inconsistencies with the guidelines offered by Popper's falsificationist ap- proach. The absence of a formal pub- lished reply—from the Rochester Schoo! or elsewhere—appears to leave the im- pression that it is appropriate to hold empirical work up to the standards of Popper. The purpose of this Note is to clarify the meaning of Popper’s falsifica- tionist approach and to argue that it is not a practical evaluative guideline for empirical work in accounting. It is im- portant that these arguments be made and understood because acceptance of Popper’s falsificationism as an attain- able ideal and the consequent evaluation of empirical work solely from this per- spective has the potential to arbitrarily and harmfully limit the nature and domain of accounting research. It is the intent of this Note to help forestall such harm. It is important to distinguish the purpose of this paper from a defense of the positive theory work that was the subject of Christenson’ critique. PopPER’S FALSIFICATIONISM: ‘A CLARIFICATION There appears to be confusion among accounting researchers concerning Pop- per’s falsificationism. For example, McKee et al. [1984, pp. 651-652] state that their study represents an attempt to refute Watts and Zimmerman [1978]. This is not correct; their study represents an attempt to confirm them. In fact, they were unable to confirm them.* However, the failure of verificationist or ‘The Accounting Review, October 1988 confirmationist tests does not constitute a refutation or falsification of a theory. It seems that the confusion among some accounting researchers about falsifi- cationism stems from the belief that the framing of an hypothesis in the ‘null”” form is a form of falsificationism. How- ever, this is incorrect. Such framing rep- resents merely an approach to testing samples, and represents a form of con- firmationism rather than falsification- ism: rejection of the null provides some support for a theory but failure to reject the null does not imply acceptance of the null, or falsification of the theory—it merely implies a failure to obtain con- firmationist support for a theory. In- deed, testing the null hypothesis. fre- quently represents a very weak form of confirmationism. When a test of signifi- cance rejects the null hypothesis, all that is inferred is that the obtained sample results are unlikely to have occurred by chance. Only if the experimental design is such that it rules out all competing explanations to the tested theory, can it be stated with some confidence that the data does provide confirmatory evidence for the tested theory. Dirricutties wiTH Popper's FALSIFICATIONISM At the logical level, Popper's falsi ficationist approach has encountered some difficulties. For example, the as- sumption that a falsifying observation will persist is itself an inductive assump- tion, based on experience that the same events or observations have persisted in the past and, hence, will persist in the + This point doesnot detract from the importance of MeKee etal’ [1983] reslls, Indeed, given the logical weakness of confirmatinism, the doubt that MeKee et [1984 throw on Watts and Zimmerman’s [1978] own, confirmatory results, and their own failure to confirm ‘Wars and Zimmerman’s [1978] theory using analterna- tive dataset, casts serious doubts on the correctness Of ‘Wats and Zimmerman’s theory.Hines future (see Salmon [1966, pp. 21-27] and Quinton [1967, p. 399}). If these logical difficulties are ignored because there is no answer to this prob- em of induction, it can be asked whether Popper’s criteria constitute either a satis- factory set of ideal criteria for theory assessment and/or an accurate descrip- tion of the selection process by which scientific theories are adopted in prac- tice. Popper held that ideal criteria for scientific-theory assessment could be es- tablished by fiat or convention, that is, without reference to the way in which science is actually practiced. His concern was with normative rules, as Christenson [1983, p. 8] notes. This concern meant that Popper did not require his @ priori rules to adequately or correctly describe the way in which scientific practice actually proceeds. However, as Lakatos [1978, pp. 123-138) discusses, it is prob- lematic to establish the suitability or superiority of a set of normative criteria. Indeed, since Popper, the divorce of nor- mative and historical (descriptive) ac- counts of theory appraisal has been rejected by leading philosophers of science, such as Kuhn, Feyerabend, Lakatos, and Laudan, Lakatos [1971, p. 91] states, “philosophy of science with- out history of science is empty; history of science without philosophy of science is blind.” It, therefore, seems appro- priate to question whether Popper's method is a descriptively valid account of the way that research proceeds in science. History “FALSIFIES”” FALSIFICATIONISM Lakatos [1978, p. 127] states, “Logie der Forschung (Popper's Logic of Scien- tific Discovery {1959]), on the whole, is dryly abstract and highly ahistorical.”” Lakatos (1978, p. 127] continues, “Where Popper does venture to remark casually on the falsifiability of major scientific 659 theories, he either plunges into some log- ical blunder, or distorts history to fit his rationality theory.” When account is properly taken of scientific history, it emerges that “history falsifies falsi- ficationism” [Lakatos, 1978, p. 123). Kuhn’s [1970] famous work is an histor- ical/sociological investigation of the way science and scientists proceed, and it clearly demonstrates that Popper’s falsi- ficationism bears no relation to the way things “really happen’” in science. “No process yet disclosed by the historical study of scientific development at all resembles the methodological stereotype of falsification. ..”” [Kuhn, 1970, p. 77]. There are no scientific theories from which all anomalies or falsifying obser- vations have been eliminated. Feyera- bend [1978, pp. 69-161] analyzes in great detail the work of Galileo, **. . .who was faced by an embarrassing amount of prima facie refuting instances, who was unable to explain them for he lacked the necessary knowledge...” (p. 159). Copernicus’ theory, which Galileo resur- rected and extended to eventually replace the Ptolemaic system, was riddled with inconsistencies and refuting observa- tions. Newtonian theory was beset_by counterinstances [Kuhn, 1970, pp. 77 91; Feyerabend, 1978, pp. 59-63; and Lakatos, 1978, p. 70]. Bohr’s atomic theory was introduced and retained in the face of precise and unshakable con- trary evidence [Feyerabend, 1978, p. 56 and Lakatos, 1978, pp. 55-58]. Therefore, it does not seem reasonable to base a large part of the criticism of the positive theory on the fact that there are some instances (or firms) that are incon- sistent with it (see Watts and Zimmer- man [1978, p. 125] for a detailed list that indicates those firms which voted on the Financial Accounting Standards Board's Discussion Memorandum on General Price Level Adjustments in the opposite660 direction to that predicted by their the- ory). Indeed, as Christenson (1983, p. 8] points out ‘From a strictly logical point of view, a proposition is falsified not by experience but only by the acceptance of another proposition with which it is logi- cally inconsistent.” From this perspec- tive it appears there are presently no well-articulated complete theories re- garding accounting method preferences and/or choices besides the positive the- ory of the Rochester School. ‘Tae Dunem PRosLem In Popper's infrequent references to the history of science, he turned anoma- lies, or refuting observations, into ‘“cru- cial experiments”? and then exaggerated their immediate impact on the history of science [Lakatos, 1978, p. 127]. Great scientists have almost’ never accepted refutations as being decisive, because of important problems and reservations which so frequently in reality accompany a refuting instance. Feyerabend, Kuhn, and Lakatos illustrate amply that a “‘re- futing”” observation may disagree with a theory for a variety of reasons and hence, in practice, a “refuting” observa- tion does not necessarily “logically” refute a theory. ‘A major problem in considering a refuting observation is that a theory con- sists of a complex of refutable universal statements, rather than a single refutable statement like, “All crows are black.” Furthermore, to permit testing, more statements than those of the tested theory are involved—the theory must be augmented by auxiliary assumptions, such as laws and theories governing ‘mea- surement and the use of instruments. Ini- tial conditions, such as description of the experimental set-up, must also be added. If a prediction that follows from these Joint premises turns out to be false, then all that can be logically concluded is that at least one of the premises is false and, ‘The Accounting Review, October 1988 hence, no individual hypothesis or the- ory is conclusively falsifiable. This problem of the jointness of testing, is referred to as the Duhem problem (see Duhem [1954}). In accounting research, for example, market efficiency research has generated many anomalies (see Foster [1984]; Lev and Ohlson [1982]; and Ricks [1982)), but researchers in’ the area have not viewed the efficient markets hypothesis as falsified, because of, inter alia, the impossibility of locating the source of the “falsification” within the maze of premises which is effectively tested by a capital market efficiency test (Hines, 1986a]. A capital market efficiency test jointly tests premises concerning data ‘quality; assumptions relating to transac~ tion cost estimation; whether informa- tion is good/bad; the timing of events and information release; a specific asset pricing model; measurement theories, instruments and procedures, and so on. Indeed, Foster (1984, p. 169] and Lev and Ohison (1982, p. 274] prefer to call efficient_markets hypothesis counter- observations “research puzzles” and ise results” respectively, rather than “anomalies” ot “falsifications.”” ConcLupING CoMMENTS The various methodologies developed by philosophers of science are relevant to accounting and finance research as organizing, heuristic, and analytical frameworks, However, to believe that there is a single ‘‘ideal”” methodology, and/or to finally judge theories against such a methodology, is ill-advised. If the dangers of scientism can be appreciated by researchers early in the methodolog- ical debate within accounting and fi- nance literature, then research may per haps be saved from the dogmatism and many diversions of resources that have resulted in other fields of inquiry and from an unwarranted reverence for scienceHines and “the scientific method” (see Berger [1966, p. 24]; Burrell and Morgan [1979]; Mackenzie [1977]; McHugh [1971]; and Schuster [1984)). For exam- ple, Mackenzie [1977] argues that be- haviorism failed largely because it was a research program devoted to the pursuit of “‘objective”” methods, to the exclusion of consideration of the fundamental on- tological status or nature of behavior, namely its dependency upon mental (i.e., ternal and, hence, not readily observ- able) processes. Similar criticisms have been made of research programs in so- ciology such as the Berger and Kellner [1981] critique of the “cult of quantifi- cation’ in sociological research: ‘ta posi- tion that any sociological propositions that cannot be couched in mathematical terms are ‘soft,’ unscientific, and use- less” (p. 126). Indeed, Mintzberg [1979] and Zeff [1983, 1986] suggest that accounting re- search may already be constrained by a repression of criticalness and creativity, caused by a commitment to using rigor- ous statistical procedures that are in- correctly perceived by accounting re- searchers to be ‘“the scientific method.”” This may be one reason why, despite calls by accounting researchers for the development of alternative theoretical perspectives on accounting which would require alternative methods (see Burchell et al. [1980]; Cooper and Sherer (1984; ‘Chua [1986]; Hines [1986a, 1986b, 1988]; 661 Hopwood [1983]; Mintzberg [1979]; Nord [1986]; Tomkins and Groves [1983]; and Zeff [1983)), there appears to be little research presently proceeding ‘on the development of alternative theories to positive theory. In concluding, this Note is not in- tended to suggest that there are no cri teria against which positive theories can be evaluated. The author believes that Christenson’s [1983] criticisms of Watts and Zimmerman’s theories remain valid without reliance on Popper because stan- dards of rigor and good experimental design are sufficient to support that Watts and Zimmerman should have: (i) avoided the use of crude proxies such as the use of firm size to operationalize the concept of “political costs”; (il) avoided the use of unrealistic assumptions in their explanatory theorizing; (ii) investigated their anomalies; (iv) clarified whether their theories were universal or probal istic, and ifthe latter, explained on what conceptual grounds they should be held to be so; (¥) if probabilistic, they should have stated the proportion of anomalous observations which would be consistent with their theories, and hence the propor- tion beyond which counterobservations would threaten their theories with discon- firmation, and (vi) rigorously tested their theories against competing hypotheses rather than merely presented data that were (partially) consistent with them. 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