How to Measure Anything: Finding the Value of Intangibles in Business, 3rd 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:

• What is the decision this measurement is supposed to support?
• What is the definition of the thing being measured in terms of observable consequences and how, exactly, does this thing matter to the decision being asked (i.e., how do we compute outcomes based on the value of this variable)?
• How much do you know about it now (i.e., what is your current level of uncertainty)?
• How does uncertainty about this variable create risk for the decision (e.g., is there a “threshold” value above which one action is preferred and below which another is preferred)?
• What is the value of additional information?

In this chapter, we will focus on the first two questions. Once we have answered them, 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 answers to these questions often completely change not just how organizations should measure something but what they should measure.

The first two questions define what this measurement means within the framework of the decisions which depend on ...