Why theory matters. Even to business and yes, even to you as well

It’s become commonplace to hear, including from my fellow academic colleagues, that we academics write articles in journals that nobody reads. Students and participants in executive programs, we are often told, want practical tools that they can apply immediately in their job, and they have no patience for theory. It often goes to the point where we are asked not so much to teach as to get participants to talk about their favorite topic, ie themselves, and lead a class discussion on this anecdotal basis supported by some multimedia slides while students are transfixed by their twitter account. Some schools have even acknowledged this and claim that they don’t teach, but develop what’s already inside participants. Put otherwise, bring your own food: we repackage what you know already and you pick up the bill. The idea that we as teachers may, at some point, introduce some theoretical content increasingly seems suspect and the sure sign of out of touch academia trying to influence a world they are said not to understand. What do eggheads know about business? The idea of teaching, that we could impart some knowledge, but also exert our professional judgment on what we should teach to whom seems preposterous and a sure sign of academic arrogance. I disagree. I teach, and I make no apologies for it.

Certainly, critics have a point and many of the articles that academics write are pointless variations on an obscure topic full of equations and encyclopedic ignorance. Some are so clearly written yet so devoid of any interesting insight that you can only applaud the perfection of the skills. Some defend results that are so pathetically unrealistic that anybody who has spent half an hour in a firm would laugh at them. I’ll grant that. So maybe half of the academic work is useless, but the other half, in which you often find gems, is rather useful. Some articles are superb, and they are referred to again and again. In my field, broadly innovation and entrepreneurship, ground breaking work includes Sarasvathy’s “Causation and effectuation” in 2001 – that if you want to understand how entrepreneurs think -, Hargadon and Douglas’ “When Innovations Meet Institutions: Edison and the Design of the Electric Light” – if you think technological innovation is about technology, again in 2001, Hill and Rothaermel’s “The performance of incumbent firms in the face of radical technological innovation” in 2003, and Christensen’s “Innovator’s dilemma” in 1997 (all his books in fact). I could list maybe 20 to 30 more of these.

Indeed, theory is important. Theory in business grew out of the recognition that accumulating recipes and anecdotes told by old-timers could not amount to a business education. There had to be some scientific method to it. At the core, scientific method only says that you cannot state a rule unless you are able to prove it – somehow. The fact that academia went beyond that and decided that a scientific method meant abstraction, distance from the field, and extreme formalization by youngsters with zero business experience is unfortunate, but it is not per se due to a scientific approach.

Theory is important for several reasons. One, as innovation scholar Clayton Christensen observed, is that we use theories in our daily lives, whether we want it or not, and whether we are aware of it or not. As Keynes, yet another theoretician, put it: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” All decisions we make, from the simplest to the most complex, are based on some theory we hold about what we decide about. When consequences are important, one might as well be rather explicit about the theory one uses in making the decision. For instance, if I refinance my house in 2006, it is because I assume that house prices always go up. Why do I assume that? Because I look at the price history, I see that they have always gone up, even in recessions, and I assume that because they have always gone up, they always will go up. So I take a new mortgage on my house. Now if Nassim Taleb happens to have coffee at my place that day, he might tell me that the price of houses is subject to black swans, and therefore just because prices have always gone up doesn’t mean they always will. He might then detail a bit more the statistical underpinnings of his claim – which I’ll skip here but they are fascinating and tell me about this thing called a bubble. Etc, etc. So unless we are explicit about the theory we use, we will use it at our own peril.

Another reason why theory is important is suggested by Herbert Simon, another of those supposedly useless academics. It also has to do with statistics and the occurrence of rare events. Rare events are usually evacuated from our statistical models, but when they occur they can have  a high impact. Simon observes that because these events are rare – one housing bubble per century? – we do not have samples that are large enough to use statistics, even assuming that the distribution would make it possible. Deprived of statistics to observe, we can only think about these phenomenons using theory. The fact that many parts of our environments are subject to random variations makes the use of theory even more important. Put otherwise, if you don’t have a rare-event-proof theory of how your environment evolves, you’re in trouble. Think Fannie Mae, Fukushima, Mubarak, 9/11, etc.

So theory is important and not just for academics. It is immensely practical, and my experience is that when students and participants to executive programs open their mind, they really enjoy it. In fact, while HR departments always brief me to be practical and avoid any abstract topics for their executives, I ignore this briefing and these invariably tend to comment that the part they appreciated most was the theory eye-opener. They leave the program with their assumption challenged, and that is already a lot.  And again, students and participants seem to enjoy it, despite what I read around.

So if don’t like theory, try to do without, and you’ll see, eventually.

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