This paper aims to improve theory formation in psychology by developing a practical methodology for constructing explanatory theories: Theory Construction Methodology (TCM). TCM is a sequence of five steps. First, the theorist identifies empirical phenomena to become the target of explanation. Second, the theorist constructs a proto-theory: a set of theoretical principles that potentially explain these phenomena. Third, the proto-theory is used to construct a formal model: a set of model equations or simulation models that encode the explanatory principles. Fourth, the theorist investigates this model’s explanatory adequacy. This is done by formalizing the empirical phenomena in terms of the model, and assessing whether the model indeed reproduces them. Fifth, the theorist studies the overall adequacy of the theory by evaluating whether phenomena are indeed reproduced faithfully, whether explanatory principles are parsimonious and substantively plausible, and whether the theory implies new predictions to promote further research. We illustrate TCM with an example taken from the intelligence literature (the mutualism model of intelligence), discuss the place of TCM in the larger scheme of scientific research, and propose an outline for a university curriculum that can systematically educate psychologists in the process of theory formation.