How to Make Decisions Based on Data: Understanding the Value of Information
In today's data-driven world, the ability to make informed decisions based on data is a critical skill for businesses and organizations. However, before diving into the process of data-driven decision-making, it's essential to understand what data is and how it can be considered a valuable asset. To explore this concept, we turn to the influential paper "Measuring the Value Of Information - An Asset Valuation Approach" by D. Moody and Peter Walsh, which outlines seven fundamental laws of information that help define its value and differentiate it from traditional assets.
The Seven Laws of Information
According to Moody and Walsh, the value of information is governed by seven key principles:
Information is Infinitely Shareable
The Value of Information Increases with Use
Information is Perishable
The Value of Information Increases with Accuracy
The Value of Information Increases When Combined
More Information is Not Necessarily Better
Information is Not Depletable
Let's delve into each of these laws and their implications for decision-making in a business context.
1. Information is Infinitely Shareable
The first law asserts that information is infinitely shareable, meaning it can be distributed among multiple parties without losing its value. Unlike physical assets, which are appropriable and limited in use, information can be shared across different business areas or organizations without diminishing its worth. In fact, sharing information often multiplies its value as more individuals or teams can leverage it to generate insights and make informed decisions.
However, this infinite shareability also presents challenges, such as the risk of information balkanization—where multiple versions of the same information exist, leading to inconsistencies. It’s crucial to maintain data integrity and consistency to avoid these pitfalls.
Key Takeaway: Organizations should encourage the sharing of information across departments while implementing strategies to ensure data consistency and accuracy.
2. The Value of Information Increases with Use
Unlike most assets, which depreciate over time, the value of information actually increases with use. Information that sits unused holds little to no value. It is only when data is actively applied to decision-making processes that it becomes valuable. This emphasizes the importance of information literacy within an organization—employees must be equipped to understand, interpret, and utilize data effectively.
Surprisingly, many organizations lack a comprehensive catalogue of the information they possess, leading to missed opportunities for leveraging data in decision-making.
Key Takeaway: To maximize the value of information, organizations should invest in training programs that enhance data literacy and ensure that all available information is catalogued and accessible.
3. Information is Perishable
Information, like many other assets, is perishable. Its value can degrade over time as circumstances change, making it less relevant or accurate. The useful lifespan of information is often short, particularly in fast-moving industries, and must be managed accordingly. However, timely and relevant information can significantly enhance decision-making and extend its utility.
Key Takeaway: Organizations should prioritize the timely collection and application of data, recognizing that its value may diminish over time.
4. The Value of Information Increases with Accuracy
The fourth law highlights that the value of information increases with accuracy. Inaccurate information can lead to costly mistakes, whereas precise and reliable data supports sound decision-making. While achieving 100% accuracy may not always be necessary, maintaining a high level of data quality is essential to avoid turning information into a liability.
Key Takeaway: Invest in data quality management to ensure that the information used in decision-making is as accurate and reliable as possible.
5. The Value of Information Increases When Combined
Information becomes more valuable when it is combined with other data sets. The integration and consolidation of information from different operational systems can lead to deeper insights and more informed decisions. However, this process can be complex and costly, requiring robust analytical capabilities and advanced technology.
Key Takeaway: Organizations should focus on integrating data from various sources to enhance its value and support more comprehensive decision-making processes.
6. More Information is Not Necessarily Better
While it might seem that having more information would lead to better decisions, this is not always the case. Information overload is a real issue that can impair decision-making and reduce comprehension. The challenge lies in finding the right balance—enough information to make informed decisions, but not so much that it overwhelms the decision-maker.
Key Takeaway: Develop strategies to filter and prioritize information to avoid overload and maintain decision-making effectiveness.
7. Information is Not Depletable
The final law states that information is not depletable; the more it is used, the more it generates. Unlike finite resources, information is self-renewing and can be continuously leveraged to create value. This makes information a unique and powerful asset in any organization.
Key Takeaway: Encourage the continuous use and sharing of information to maximize its value and drive ongoing organizational growth.
Leveraging the Value of Information in Decision-Making
Understanding these seven laws of information provides a strong foundation for making data-driven decisions. By recognizing that information is a unique and valuable asset, organizations can better manage and utilize their data to achieve strategic objectives.
As you embark on your journey to make more informed decisions, consider how your organization handles information. Are you maximizing its potential, or are there areas where you could improve? Investing in data literacy, quality management, and information integration can significantly enhance your decision-making processes and ultimately drive better outcomes.
