The value of information is the level to which it can extend our ability to sense our environment over time and place.
Idea in brief
In this third post I explore a complex question: ‘What is the value of information?’ I have come to the conclusion that to answer this question we have to use the philosophy of Aristotle. More specifically, I discovered that the value of information is the level to which it can extend our ability to sense our environment.
Drawing from my experience as the founder of a digital media company in the 90’s, being an information consultant in the 00’s and working with today’s big data, I first explore the reinvention of the value of information throughout the last three decades. I find that existing theories s do not provide a sufficient answer. The fundamental value of information is not in its application. Rather, the economic theory about ‘making decisions’ reduces the value to choosing between preset options and the business case theory only explains that we have to find value, not how to find it.
To find the value of information I dive deeper into what it means to be a human being. By discovering that Aristotle defines the human soul as a ‘natural sensory body’.,as a result, the value of information is the level to which it can extend our ability to sense our environment of time and place. Applying this theory to existing uses of information, ranging from paper documents to accounting systems, I come to the conclusion that this not only provides a much better explanation of what the value of information is, but that it also gives us a new way in getting more value out of new technology.
About the series: Exploring the future of information
This is the third post in a series in which I explore the future of information. In these posts I combine a variety of concepts ranging from the impact of the philosophy of Aristotle on using information to the Internet of Things.
2. Why ancient Egyptian building concepts should not by applied to the use of information
4. Consumerization of Information
5. Consumer Data Governance
6. The right app-platform for the Internet of Things
7. The stars in the future field of information technology
The reinvention of the value of information in the 90’s, 00’s and 2010’s
Every decade the industry of Information Technology reinvents the importance of ‘the Value of Information’. When a new paradigm is introduced there seems to be a great need to put meaning to this new technology.
I began my career in 1994 by starting a digital media company, which was a common thing to do for teenagers in the 90’s. The book, Information Rules, written by Carl Shapiro and Hal Varian in 1998 completely captures the ideas about the value of information in the dot com economy. Rereading this book made me long for the wonderful years of the late 90s in which people, including these authors, believed the use of information would erase poverty.
A decade later I made a career change to the field of Business Intelligence. Often very vague and full of consultancy buzzwords ‘the Value of Information’ was the central theme of many pitches to potential clients. Mad Men’s Don Draper wasn’t around yet to explain all the details, but the belief that we had to sell to a client’s need instead of selling product features was already there.
Starting in 2010, the rise of big data and its related technology has again raised the question: ‘What is the value of information?’.More and more articles and blog posts are questioning the added value of this new technology instead of writing about the technology itself.
My career started in the 1990’s, but the question regarding the value of information existed before that. Actually it existed before the invention of modern Information Technology. A great example of this is the Book Wheel (Figure 1). For which I have to give credit to my wife for introducing it to me. The Book Wheel, an invention of the 17th century, was a solution to the information overload created by the book-press. Information was so valuable that a solution had to be found so people were able to take in more.
All this time I do not believe that a sufficient answer has been given to what the value of information actually is. Before I give my own ideas about this topic and introduce the help of Aristotle, I will look at three existing theories and explain why these do not to provide the right answer. These are the application of information, economic theory (making decisions) and the business case.
Why existing theories do not provide the right answer
1. The fundamental value of information is not in its application
As a consultant I have been part of many discussions trying to find best definition of the value of information. In many of these discussions there was always someone who would say that the value of information is in the application of information. This is in my opinion not a valid answer.
The philosopher who lends his name to this post gave us a great way to use analogies to dispute this theory. Saying that the value of information is in the application of information is like saying the value of a brick is that it provides a roof over our head because with a brick you can build a house. And the house provides a roof and shelter. But the brick has value to the house and it is the house that in turn provides the roof. So the value of the brick is that it provides structure, stability and easy application and not that it provides shelter.
Now lets use a better billing process as an example for the value of information. Following the analogy of the brick and the house, better information improves the billing process. This results in better paying clients and an improved cash flow. In this scenario it is the improved billing process that improves the accounts payable. The value of information is to the billing process not to the cash flow. Or stated differently, the value of information is the value it can bring to its application, not the application it self. To find the value of information to the improved billing process we have to use Aristotelian philosophy, which will be explained below.
2. The economic theory about ‘making decisions’ reduces the value of information to choosing between preset options
The economic theory behind the value of information is about ‘making better decisions’, which is the fundamental concept behind many of the existing ideas around this topic.
This concept is often presented in the abstract. Two months ago I attended a conference, officially about Business Analytics, but given the current hype the words Big and Data were used more often. The keynote speaker’s main argument was that the starting point of crating value from information were the many ‘little decisions’ made by operational employees instead of ‘better management decisions’. He did this without clarifying either of those decisions.
The very concrete example presented in box 1 clearly shows the fundamental aspects behind this theory, even if people use these aspects in a more abstract way. The scenario presented in box 1 describes a decision that has to be made about whether or not to introduce a new product. The value of information is that it indicates if the product will be a success or not before the product is introduced. As a result you will not incur a loss of 2 million dollars if the product happens to be failure.
Box 1: Should the Standard Breakfast Corporation introduce a new product?
Adapted from ‘Economic Approaches to Organizations’, Sytse Douma & Hein Schreuder, 1991.
You are the marketing manager of Standard Breakfast Corporation. A new product has been developed and you have to decide whether or not to introduce it. If the new product is a success you gain 8 (million dollars). If it is a failure you lose 2 (unfortunately also million dollars). Your estimate that the new product will be a success is 0.3, that it will be a failure 0.7. What do you decide?
If you are risk neutral, you should simply calculate the expected value of introducing the new product: 0.3 X 8 + 0.7 X (-2) = 1 (million dollars). This is positive, so you should introduce the new product. This scenario can be graphically represented in a decision tree (figure 2), where the value of start node C is also 1 million dollars.
Now suppose that you could do test marketing and that test marketing gives you complete information. How valuable is this complete information in this case?
The information does not influence whether people actually like the product. Up front there is still a 0.3 chance of a success and a 0.7 chance of a failure. The result of the marketing test will however tell you if the product will be a success or not before you introduce the product. If the test tells you the new product will be a failure you will simply not introduce it. As a result you will never incur the loss of 2 million dollars. The new expected value is 0.3 X 8 + 0.7 X 0 = 2.4 (million dollars).
The value of information in this case is the difference between the two expected values: 2.4 – 1= 1.4 (million dollars). If the test marketing costs are less than this amount, it is rational to test the product. There is also a way to calculate the value of imperfect information, but for the purpose of simplicity I will not go in to deep into this economic reasoning.
The problem with the economic theory of decisions making is twofold. First, it reduces the value of information to making choices between-often only two-preset options. Now there might be situations like this, in which information can very valuable, but it does not do justice to the value that information can bring. For example in the scenario presented in box 1 the use of information is reduced to choosing whether or not to introduce the new product. Information, however, can be even more valuable when designing the product in the first place. Using information to design the ‘right’ product is more valuable then asking yourself weather or not to introduce it. Or perhaps tweaking the product a little and introducing it in market B instead of A is a much broader decision than the two options presented in box 1.
Second, the economic theory sees people, both in their private and their professional life, as continuous, conscious decision makers. My experience as a consultant is that the reluctance of people to adopt information systems is that they do not agree with this worldview. I believe they are right. People are, when taking actions, most of the time unaware that they’re making a decision. More important (related to my first argument), information can be more valuable in knowing which decisions you have to take instead of making the decision itself.
3. The business case theory only explains that we have to find value, not how to find it.
I can be short about the business case because it only gives us a meta model. The business case theory explains that we must find what the value is, but it does not explain how to find it.
There have been attempts to make this search for value, or benefits, more concrete. For example the benefits logic model, created by the consulting firm Capgemini, connects solutions to outcomes called benefits and defines concrete value areas that it tries to quantify. Within the benefits logic model, however, the definition of value is often left to expert judgment leading to a false sense of security.
More important, the benefits logic model, like the business case, sees the use or applications of information as a source of value and not the information itself. As explained above, the fundamental value of information is not in its application.
Aristotle on the value of information
When spending a considerable amount of time on the value of information, I was at first disappointed that existing theories where not sufficient. This changed when I remembered what Aristotle believes is the definition of the human soul and realized how this relates to the use of information. It’s as if the finding the essence of being a human being also defines the essence behind information.
Aristotle states that the soul is a ‘natural sensory body’. In one of his major works, On the Soul, Aristotle explains the nature of living things. In his work he spends a considerable amount of time on the difference between plants, animals and humans. The essence of the soul, including those of humans, is the possibility to take action based on sense-perception.
What does this mean for information? How does the theory of Aristotle on the Soul explain its value? If the essence of being a human being is the possibility to use sensory input, the value of information is that it extends this sense-perception. Information allows us to extend our sensory input in two ways: time and place. These are the two dimensions that, according to another great thinker, Albert Einstein, define our universe. Information extends our possibility to sense our environment in these two ways.
The value of information is the level to which it can extend our ability to sense our environment over time and place.
Take for example the case of an historic document. This document allows us to see something that happened a long time ago and we can no longer see. It thus extends our sensory input over time. Another example: management information. Management information allows leaders at the top to see what happens in various parts of the organization without actually being present at that location. It thus extends their ability to sense their environment over place. The third example shows the extension over place and time. I promised to come back to the example of the improved billing process. In this case, information allows us to see how a specific transaction took place both in a different place and a different time. And although we now can no longer see that transaction or are at a different location, information extends the sensory input as if it was happening right now.
Seeing the value of information as the level to which it can extend our ability to sense our environment over time and/or place has great implications. Most of all it means we have to take an individual approach to using information instead of a top down corporate approach. Box 2 gives a brief explanation of how this new theory can be applied to big data. The individual approach is further explored in my next post: the consumerization of information.
Box 2: Big Data is to information as the Microscope is to science
Defining the value of information as the level to which it can extend our ability to sense our environment also sheds a new light on the concept of ‘big data’. Not by focusing on the volume of data, but on the type of data that is being used. As a data source many information systems use data that has been manually entered. Take for example ERP data used by an information dashboard. This data comes from people entering data into an application they are using. In this way information only extends our own sensory input to things we could have seen or heard if we would have been present at that location in time.
By using data from digital sensors big data extends our senses’ capabilities further to the things we normally could not see or hear. As such the big data paradigm is to information systems as the invention of the microscope was to scientific data collection. It allows us the see things in our world that even our own eyes cannot.
Interesting article – I wonder if you might be interested in the more recent (than Aristotle) concepts around information theory, which essentially state information’s value relates to its ability to reduce entropy (uncertainty)
Niek, First, congratulations on exploring this ever-important topic. I/Gartner have found that a lack of appreciation for, even quantification of- information’s value leads to gross information management and deployment inefficiencies. This is the impetus behind our research on what we call “infonomics”.
You write of “fundamental value”. This gets to a challenge itself. “Fundamental” has several meanings ranging from “origin” to “base” to “essential” to “most important” to “innate”. “Value” is a term that is tossed about too casually, and “fundamental” is another nebulous term.
This is why when we write and advise clients on information value, we are *very* careful to clarify whether we are speaking of potential value, probable value (accounting value), or realized value. And the ultimate goal of all value quantifications in business (notwithstanding the Shannon-esque engineering treatment of information value) is to translate this into the language of business: money.
The potential value of information is its value if fully applied in all realistically possible ways; the probable value takes into consideration current capabilities for deploying it; and realized value is the actual quantified benefit.
It is also important to recognize perspective, i.e. the value of the information itself summing its many uses, or the value of information to a particular entity.
Almost everyone I speak with and articles I read conflate these important clarifications–leading to impractical or improper conclusions.
That said, I do appreciate the ethereal concept of information extending our senses. However I would clarify that it is that which generates the information as being the extension of our senses, not the information itself. Information is what is manifested and communicated, not an inorganic sensory organ itself.
You argue that information’s value is not in its application (deployment), but clearly that is one valid way to measure it (i.e. the “realized value” I mentioned earlier). And I’m not buying the “brick” anology at all; clearly the brick has measurable contributory sheltering value as a part of the whole. Same with the accounting system. Merely declaring a disconnection or disassociation between the information and improved cashflow doesn’t make it so. The dots are connected, you cannot unconnect them.
Your argument against economic theory also has some gotchas. While Varian and Hubbard et al reduce the economic value of information to “decisions-making”, this is artificially restrictive. In addition, they restrict decision-making to a set of finite choices. Nothing could be further from reality. Consider any form of creative process or innovation: infinite possibilities. Also, proper economic theory looks at contributory processes, not just decision-making.” True, some/many processes involve decision making, others may not, but all have an economic effect. For example, information can be used to speed, integrate, alter or eliminate processes as well…having nothing whatsoever to do with decision-making.
Generally I agree with you that business case theory falls short in established methodology. However, as shown above proper economic analysis of information’s value (not just for decision-making) is entirely valid. The infonomics valuation models I have developed and deployed can quantify demonstrable empirical (even monetary) value of information, beyond theory. Again, I’m left wondering in this section what you mean by “fundamental”.
Regarding Aristotle, I know we humans can’t control our need to claim “if something is good for us, then it is inherently good.” This kind of genus-centric philosophy was valid centuries ago, but in light of recent knowledge about the affect human advancements have had on our planet and other fauna/flora, perhaps an updated a priori to this philosophy is in order.
As I concluded reading this post, it occurred to me by “value” you’re really merely discussing “benefit” — something that can but need not be measured. Now I feel led astray. “…the level to which it can extend our ability to sense our environemnt over time and place” is interesting philosophically but hardly a revalation. I’m hoping to see the practical application of this in your next piece. Keep ’em coming!
–Doug Laney, VP Research, Gartner, @doug_laney