45 Chapter III Research Methodology III.1 Introduction The following section will provide philosophical background, reasoning approach and research strategies and methods along with the associated data and time horizon related to answer the questions related to index fund growth and survivability phenomena. III.2 Research Philosophies Research philosophy or research paradigm refers to a system of beliefs and assumptions about the nature of reality in the development of knowledge. A research paradigm, according to Kuhn, (1962) is the set of common beliefs and agreements shared between scientists about how problems should be understood and addressed. Burrell & Morgan (2016) reasoned that whether a researcher is consciously aware of those belief system or not, at every stage in the research, they will make several assumptions. These assumptions will shape how they formulate the research questions, and the methods used and interpret any research findings (Crotty, 1998). There are two types of research assumptions most discussed in the business and management research textbooks: ontology and epistemology. Ontology represents the assumptions about the nature being or reality (Saunders et al., 2019). There are distinct views on how researcher can see the reality. Either as one objective reality or multiple realities. Index funds as a regulated investment vehicle are expected to be viewed as objective reality from the ontological assumptions. Even though each stakeholder has a different incentive when dealing with it. For example, fund manager seeking for rent (fee) and will do any necessary action to maximize their fee. An investor seeking highest investment net return and the least cost possible. While regulators seeking broader real economic impacts with the growing assets in the capital markets. Epistemology related to the assumptions about knowledge. It refers to what constitutes acceptable, valid, and legitimate knowledge. Ontology is related to how 46 knowledge communicated to others (Burrell & Morgan, 2016). There are two contrasting views on the epistemological assumptions. First, Objectivism comes up with the notion that there is one true explanation, and social reality is external to the researcher. Second, subjectivism which contend that social reality is made from the perceptions and consequent actions of social actors. Subjectivism lens identify meaning as culturally defined. Index fund model likely to adopt objectivism as epistemological assumptions. However, the researcher has agreed with Reed (2005), who argued that the phenomena to which scientific research and explanation are directed have underlying structures and mechanisms that produce empirical events rather than the phenomena itself. The phenomena of index fund growth and survivability cannot be seen as only empirical event. To understand it, the researcher needs to go deeper to its structure. It is to no surprises; the researcher might encounter the mild objectivism in the process. Some business and management research textbooks also discussed the role of value and ethics (axiology) and its relation to the area being research. Saunders et al., (2019) recount that it is important to articulate value and believe for making judgement about what and how the research is going to be conducted. In finance, specifically index fund context, a researcher may believe that fund information (prospectus, fund fact, expense ratio, tracking error, front and sales load, etc.) should be available as much as possible to stakeholders that will help them in making decision. Researcher could also has believed that competition in the index fund market, either by lowering the cost or improving the performance could improve market efficiency and would serve a greater good for the investor, industry, and the economy. There are two major opposing philosophical positions in business and management research which are positivism and interpretivism. On one side, positivism promises unambiguous and accurate knowledge. The positivist focusses on strictly scientific empirical method designed to yield pure data and facts uninfluenced by human interpretation or bias. In contrast, interpretivism emphasizes that humans are different from physical phenomena because they create meanings. Interpretivism 47 argues that human beings and their social worlds cannot be studied in the same way as physical phenomena (Saunders et al., 2019). In between these two philosophical positions there are realism, critical realism, constructivism, postmodernism, and pragmatism stances. Even though the supporter of each stance may reason on the superiority of their philosophical positions, each research philosophy contributes something unique and valuable to business and management research, representing a different and distinctive way of seeing organizational realities (Morgan, 2006). Current research on index funds or mutual funds is mainly viewed from the positivist stance. It is also relevant to the dominant belief that rational investors operate in the efficient markets. The research methods follow strictly scientific empiricist methods designed to yield fund performance data, statistical relation, and rational conclusions. However, as the contender of the Efficient Market Hypothesis (EMH) argue that investors’ decisions are biased, research on fund flows into and out of the index fund will provide a complementary understanding when viewed from a philosophical stance other than positivism. Exploring the causal structure on the index fund investment model underlying the index fund performance and survivability issues might offer broader perfective when be observed using the critical realism philosophical position. Reed (2005) explained that critical realism focuses on explaining phenomena (what are seen and experienced) in terms of the underlying structures of reality (the real) that shape the observable event. As illustrated in Figure III-1 the growing phenomena of index funds, or in general passive investing, is the event that is actually observed (empirical); however, the casual structure or mechanism causes the situation (the real) has not yet been seen. The critical realism paradigm seems to align with system thinkers believe that system behaviour (facts) is driven by the causal structure (reality). System thinker further explore the casual structure in social science consist of physical and decision-making structure that consists of interdependent variables forming a closed feedback loop. According to (Senge, 1990) the principle of systems thinking is to observe the interdependent relationship (influence and influenced or feedback), not direct cause-effect relationships, and to observe the processes of change or 48 ongoing processes. There are two steps in understanding the world from the critical realism position. First, some sensations and events are experienced or observed. Second, there is mental processing when researchers ‘reason backward’ from experiences to the underlying reality that might have caused them. Figure III-1 Critical realist stratified ontology. Source: Saunders et al. (2019) Research on the index fund model may aKelemen & Rumens (2008)stance. Kelemen & Rumens (2008) indicated that pragmatism asserts that concepts are only relevant where they support action. Pragmatism strives to reconcile both objectivism and subjectivism. Pragmatists consider theories, concepts, ideas, hypotheses, and research findings not in an abstract form but in terms of their roles as instruments of thought and action. As Elkjaer & Simpson (2011) pointed out, pragmatists research intensely within a practical domain where they start with practical problems and aim to contribute practical solutions to inform future practice. They seek their practical consequences in specific contexts. Pragmatism philosophy might be relevant to the index fund model as the researcher start with problem, and this research offer a practical solution to the fund manager through scenario analysis. Pragmatism stance seems to align with the intend of system dynamics help people make better decisions when confronted with complex, dynamic systems. However, as the underlying structure generates the fund behavior, changes in the variables or relationships within variables will produce different behavior. Understanding phenomena from a causal structural point of view, including identifying leverage points within the structure that alter system 49 behavior (sensitivity analysis), is a more fundamental approach to knowledge. Hence, the critical realism stance is best suited for this research. Another approach to the research philosophies is using the frameworks on social paradigm. Borrowing Burrell & Morgan’s (2016) frameworks on sociological paradigms and organizational analysis, Lane (2000) redrawn the constituent school of paradigm as in Figure III-2(a). He reasoned that although system dynamics initial home is the functionalist paradigm fitting system dynamics into a certain paradigm is problematic. Functionalist paradigm is located in the dimension between the objective views if social science and regulation views of society. Typical research within this paradigm provides rational explanations and develops recommendations within the current structure. However, Lane acknowledged that the initial system dynamics has expanded into three major strands as it evolved and interacted with other research methods. The first two variants are still within the functionalism quadrant, while the soft SD versions as seen in Figure III-2(b) departs toward an interpretive sociology paradigm and towards the sociology of radical humanism paradigm (Lane, 1999). Jackson (2019) calls them as hard, mainstream, and soft system dynamics. Figure III-2 (a) Frameworks of social paradigm and (b) Social theories of SD practice Source: Lane (2001) Although the researcher can try to fit the research using system dynamics within the mainstream paradigm, Lane (2001) concluded that fitting the system dynamics within the specific conventional social science paradigm is a challenge. He reasoned that a more natural theoretical home for system dynamics is with integrationist social theory which has the root to Giddens’s structuration theory. In 50 Figure III-3 Lane represents the dualistic or feedback relationship between agency and social structure as described in Gidden structuration theory. In this theory, human agency and social structure exist in a reflexive relationship to each other's (Giddens, 1984). Social actors (i.e., fund managers, investors, regulators) draws upon and reproduce structural features of wider social systems (i.e., Index Funds and mutual fund industry or in general the financial market). System dynamics maintains a role in social structure as partially determining human choice but recognizes that individual mental models and actions could contribute to social structure. System dynamics is in an excellent position to understand and exploit the dialectical connection between structure and agency, because of its emphasis on feedback relationships. Combined with critical realism, the researcher expects to explore the underlying structure of the agency actions which include communication (rationalization), power (allocation of resources) and sanction (discipline). Figure III-3 Feedback relationship between agency and social structure Source: Lane (2001) This research adopts Gidden’s theory of structuration to analyze how index funds produce and are the products of structures that reinforce and transform the institutionalized investment practices in the capital market from which the effects 51 of power flow. Specifically, it identifies the capabilities and features of index funds that are reconfigured to embed organizational structures within them that change the investment landscape. The research is expected to explain the ways index funds are formed to embody three general forms of modalities central to Structuration Theory: (1) interpretive schemes, (2) facilities, and (3) norms. The research aims to provide analysis of the index funds by their roles in enabling how these structural modalities construct realities in the shifting of investment practices against predetermine organizational thinking and doing. Empirical evidence will also be provided of how index funds reinforce and change organizational structures through their adoption, growth, and even the counterintuitive reaction froBryman & Bell (2011)ed funds. Bryman & Bell (2011) provide an example of how the relationship between structural form and individual agency influences the diffusion and enactment of managerial knowledge. They referred to research in project management, which argued that project management practices could be seen as the outcome of a complex relationship between structural attributes and individual agency. In recursive actions, actors also draw upon, enact, reproduce, or modify the structural properties of the system in which they are embedded. They highlight the influence of the structural conditions that created circumstances in which individual actors could act upon the new initiative by drawing on shared local perspectives. Alike a project management, the creation and management of index fund within the fund manager perspective can be seen as a project. As the agency, the fund manager is in the position to influence and be influenced by the structure. In this area, a researcher can use the dialectical distinction between society and the individual or between structure and agency in understanding social and organizational phenomena. III.3 Reasoning Approach A theoretical framework usually guides the research project to provide reasoning approach to explain the phenomena. It is either theory testing or theory building with two distinct approaches to the reasoning it adopts, deductive or inductive. The 52 deduction involves theory testing that is subjected to a rigorous test through a series of hypotheses. While research using an inductive reasoning approach is concerned with the context in which such events occur and building theory above it. Our research will follow a more relaxed inductive and deductive demarcation. Instead of moving from theory to data as in a deduction or data to theory as in induction, the reasoning approach will move back and forth, combining deduction and induction. This reasoning is called abduction or sometimes called retroduction, as Charles Peirce reintroduced it (Project, 1998). It is also in agreement with Reed (2005) who argued that critical realists embrace a mild subjective approach to knowledge as causality cannot be reduced to statistical correlations and quantitative methods, and a range of methods is acceptable. Retroduction is used, Peirce added, when a researcher encounters data that are difficult to account for using existing theory, and there is a need to make sense of that data.