I was talking to Ron Howard, a pioneer in Decision Analysis, about value.
How do you know what you want? Usually there are some high-level constraints, such as ethical and legal behavior, then many possibilities.
In many business contexts the answers are relatively straightforward: more money, sooner, and at less risk. But often discussions get muddied by many objectives: strategic fit, difficulty, market potential, budget, etc.
Dr. Howard offered a crucial distinction about value metrics: direct vs. indirect value. Direct values are those you trade off directly, indirect values are proxies for things you really care about.
Consider purchasing a car. You might have objectives around total cost of ownership and MPG. But MPG is simply part of total cost of ownership--based on fuel consumption and prices, this translates into dollars quickly. So MPG is an indirect value: you could compute whether or not it is desirable.
However, MPG today conveys bragging rights. This is distinct from the economics of MPG. So the MPG metric may be obscuring a direct value: green pride. You have to make a value judgement about how much you are willing to pay in total cost of ownership to achieve green pride. Nobody can tell you the right answer, as this is a value judgement.
Dr. Howard's advice is to always look for the direct values and focus your decision making on those. Get one or two clear direct value measures, and understand your tradeoffs among these. What are you willing to pay for green pride bragging rights?
This advice has always held me in good stead. I have seen very complex situations and choices literally littered with metrics and infested with confusion become crystal clear by identifying the real direct values and tradeoffs among them. From decisions on whether to run the Tennesee Valley Authority River system for Power Production or Recreation, to decisions about which house to buy, to portfolio prioritization in R&D, getting clear about the direct values is often a key to turning confusion into insight.
In business, it usually boils down to money. Even the three I mentioned at the begining: more money, sooner and at less risk can usually be reduced.
Money sooner versus later is usually an indirect value, based on discounting at the cost of capital. The direct value for money sooner versus later usually has to do with meeting street expectations, not money per se. Usually this is not really an issue.
Often "risk" is a stand in for "we have made assumptions nobody believes", and is not really a value at all, but rather a symptom of poor information.
Treating information as uncertain and modeling uncertainty in an economic case goes a long way into dealing with risk. When risk remains part of the decision, then it often remains as a direct value: greed versus fear.
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