You’ve probably heard about these terms before. Top down and bottom up. These terms refer to securities analysis methods that investors use to determine value. But, it’s also evident in other areas of economics, investing, finance and business. While these two methods are quite similar to one another, in practice they are two different approaches and this is what most investors miss about it.
Each method is pretty simple to understand. The top-down approach takes you from the general to the exact, while the bottom-up approach starts at the exact and goes to the general. They are two sides of the same coin.
As such, you can use these analysis methods for a wide variety of applications, from forecasting to budgeting and goal setting. But, in finance, analysts are often required to use only one approach in order to truly understand the gist of what they’re analyzing.
What is the Difference Between Top Down and Bottom Up?
The top-down and bottom-up methods were initially created in order to understand and analyze the process of product manufacturing. They were first applied in 1989 by the Foresight Institute to the nanotechnology industry. The goal was to distinguish the differences between conventional manufacturing and molecular manufacturing.
The goal of a bottom-up approach is to understand how small components combine to create incredibly complex groups of objects. Top down approaches are there to develop nanoscale devices through the use of externally controlled devices which are usually much larger in comparison. Silicon nanowires which are considered to be valuable nanostructures can be created using any of these two methods. The preferred processing method is based on the intended application.
Through the traditional microfabrication and workshop methods, the top-down approach allows externally controlled tools to shape, mill and cut materials into any shape or sequence. Inkjet printing, photolithography, and other micropatterning techniques are all part of the top-down approach of the manufacturing process. Things like vapor treatment are a novel secondary top-down approach that allows you to create nanostructures.
On the other hand, a bottom-up approach works through the use of single-molecule chemical properties which allow single-molecule parts to assemble and organize on their own to create useful patterns. These methods both use concepts of molecular association which is prevalent in supramolecular chemistry.
These bottom-up approaches can create cheaper devices when compared to top-down methods, and they can be quite overwhelming when you consider the sheer complexity and size of the assembly requirements.
Why is Bottom Up Better Than Top Down?
The top-down approach works very much as it sounds. All decision making is done at a top tier management level and then those decisions are filtered down to lower-level employees for implementation.
The bottom-up approach is very different in that it enables the whole staff to communicate and contribute to the decision-making process. Therefore, everyone feels like their voice is heard and that they have an opportunity to reach their goals through the company.
The upside of using the top-down approach is that it’s efficient and it gives you a bird’s eye view of everything so that you can internalize external effects. On the downside, there is often a reluctance from lower-level employees to implement a strategy if they feel that it has been “imposed” upon them. A bottom-up approach is much more inclusive and dynamic in comparison because it allows for collaboration from the bottom and the top.
What Does Bottom Up Approach Mean?
With a bottom-up approach, complex systems are created by combining other systems in order to turn the previous systems into a much larger system. Bottom-up processing allows you to use environmental perception to process incoming data.
According to Cognitive Psychology, sensory input happens when data comes in through the eyes, and the brain interprets this information which we eventually perceive as built-up output. A bottom-up approach requires that you specify base elements in order to piece them together and create proper subsystems. These are combined on a level to level bases to create one main, top-level system.
This strategy is similar to the “seed” model which starts with small beginnings and ends in a much larger and complex system. Of course, organic strategies are subject to a number of other subsystems and elements that are individually developed and are thus susceptible to local optimization.
What is a Top Down System?
A top-down system is also referred to as stepwise design or decomposition and it refers to the systematic disintegration in order to better understand its inner workings, particularly its sub-systems. This is also known as reverse engineering.
The top-down approach requires that we get an overview of the entire system. Although we can get specifics when using this approach, it’s not as detailed as first-level subsystems would be in a bottom-up approach. This allows you to truly refine your perception until you get to the base elements. Thus, a top-down approach is often achieved through the use of “black boxes” for easier manipulation.
But, it might be difficult to provide adequate details for elementary mechanisms when using black boxes thus failing to validate the model realistically. The top-down approach begins with a big picture that’s disintegrated into smaller segments.
How to Decide on a Direction to Take?
Most modern-day organizations are apt to use either the bottom-up or top-down method when approaching different projects. An even larger number of companies seek to include parts of the bottom up philosophy into their project management practices.
It doesn’t matter how automated the systems of a company are, it’s possible to benefit from a bottom-up approach regardless of the industry. That’s because this method is great for creating employee morale through active employee collaboration in the project planning phase.
Companies in technology and software have a greater incentive to pursue the bottom-up approach because it allows them to maximize employee creativity and expertise availability.
Both top-down and bottom-up methods can be useful when completing a company’s checks and balances, among other financial approaches.
For instance, a top-down investment will mainly look at macro trends when investing but will still look at the essential aspects of its investments (bottom-up) before making a final decision.
The same goes for the bottom up approach, whose focus is on the essentials of investing but requires the systematic analysis of a top-down approach. You really can’t have one without the other.