Grounded theory is an approach to scientific and social science research which emphasizes inductive reasoning, or beginning with data and formulating a hypothesis to fit it, rather than the more common deductive scientific method approach, of forming a hypothesis on the basis of theoretical knowledge and then testing it against observed, experimental data.
Grounded theory emerged in the 1960s and 1970s through the work of Barney Glaser and Anselm Strauss, both of whom were American sociologists. At the time, they were both relatively young scholars, interested in the sociology of professional careers in the sciences, but collaborated on a study of dying in hospitals which spurred them on to develop the method known as grounded theory. Subsequently the two disagreed on the nuances of the theory, so that academics today may refer to "Straussian" or to "Glaserian" grounded theory. From a layman's perspective, the differences between the two are relatively minor.
The scientific method at its simplest refers to ensuring to develop theories with reference to empirical data, and to collect empirical data from observable, repeatable experiments with the goal of forming theories about how the natural world works. Usually, this process involves developing a hypothesis, or an initial guess or conjecture, based on one's knowledge of the existing literature combined with what one expects to find from an experiment. The actual experiment, or data collection in the case of social science, then "tests" the hypothesis. A hypothesis which seems borne out by one set of studies is usually subjected to more, and once it is generally accepted by the scientific community, it is referred to by the more elevated title of "theory," or even "law." Science as such is a continual testing of theories.
Glaser and Strauss argued that this "method" was actually highly misleading. They argued that a researcher should not need to develop a hypothesis first and then test it second - indeed, they argued, scientists didn't really work that way anyway. Research done from a grounded theory perspective does not begin with a hypothesis to be tested. Indeed, it need not begin with an extensive review of the published literature (usually a standard step in research). Instead, Glaser and Strauss argued that researchers should plunge themselves directly into the data collection process, building up an extensive corpus, or body, of knowledge in the form of observations, field notes and so on.
Once the data is collected, the researcher immerses herself or himself in it, reading and re-reading their collected data and discerning pattern, trends, or relationships between variables. This process of identifying, describing, and developing categories and relationships within the data is known as coding. Only at the end of this process does the researcher then develop their hypothesis about the processes they have been observing. Rather than start with a hypothesis and test it with data, then, grounded theory begins with data and tries to come up with a hypothesis that best describes the data.
Sources and Further Reading
Steve Borgatti. "Introduction to Grounded Theory."
Grounded Theory Institute. "What is Grounded Theory?"
Southern Cross University. "Grounded Theory: A Thumbnail Sketch."