How to Measure Anything: Finding the Value of "Intangibles" in Business, Second Edition

Chapter 4. Clarifying the Measurement Problem

Confronted with apparently difficult measurements, it helps to put the proposed measurement in context. Prior to making a measurement, we need to answer the following:

1. What is the decision this measurement is supposed to support?

2. What is the definition of the thing being measured in terms of observable consequences?

3. How, exactly, does this thing matter to the decision being asked?

4. How much do you know about it now (i.e., what is your current level of uncertainty)?

5. What is the value of additional information?

In this chapter, we will focus on the first three questions. Once we have answered the first three questions, we can determine what we know now about the uncertain quantity, the amount of risk due to that uncertainty, and the value of reducing that uncertainty further. That covers the next three chapters. In the Applied Information Economics (AIE) method I have been using, these are the first questions I ask with respect to anything I am asked to measure. The AIE approach has been applied in over 60 major decision and measurement problems in a range of organizations. The answers to these questions often completely change not just how organizations should measure something but what they should measure.

The first three questions define what this measurement means within the framework of what decisions depend on it. If a measurement matters at all, it is because it must have some conceivable effect on decisions and behavior. If we can't identify ...