The Need for a Better Approach

The most important decisions in business and government are also those with higher uncertainty and at least some factors that appear to be immeasurable. Risk, value, performance, and quality are just a few factors that need to be measured in order to be managed. Making economically rational decisions is becoming both more important and more difficult.

Yet, the most common methods used for assessing risky decisions are shown to provide mostly a “placebo” effect – management feels better but there is no measurable improvement in decisions or forecasts. Traditional accounting-style cost/benefit analysis does not quantify uncertainty and often excludes factors that are thought to be unquantifiable. Other methods attempt “soft” analysis techniques that add their own errors to the decision process while causing management to feel they are doing something about the problem.[/three_fourth_last]

If you are an executive in a position to make big decisions in your organization, you probably have asked yourself many of the following questions:

  • How can I compute a return on an investment if most of the benefits seem “intangible”?
  • How do I measure and manage risk when there is little historical data on this kind of investment?
  • How do I calculate the value of more, better, or faster information?
  • Is there any alternative to our subjective and politically driven decision process?

 

The AIE Solution

Applied Information Economics (AIE) is the first truly scientific and theoretically sound method developed for addressing the dilemmas even when they are thought to be too soft or uncertain for such methods. AIE uses methods that show independently, scientifically measured improvements to management forecasts and decisions. Even so-called intangibles like information value have proven economic formulae used for years in other areas of business.

Applied Information Economics
A Synthesis of Methods
  • Economics
  • Operations Research
  • Modern Portfolio Theory
  • Decision Psychology
  • Decision Theory
  • Game Theory
  • Options Theory
  • Quantitative Risk Analysis

 

The key to AIE is how it focuses the analysis on measuring what matters. AIE computes the value of information for the uncertainties in a decision and targeted measurement efforts are applied only where they have the most effect on the decision. This has been widely used in many practical business environments including insurance, manufacturing, transportation, utilities, banking, .com startups, and media. AIE is a complete-solution methodology that includes training, tools, process documentation, and initial consulting. Unlike methods that produce arbitrary “scores” or unrealistic ROI’s, AIE conducts a true “Risk/Return” analysis that would be recognizable to actuaries, economists, and financial analysts. All measurements are real measurements that are based on proven methods and have a known statistical validity.

AIE provides a measurable improvement for management decisions. This is the only method that can actually compute its own information value. Based on information value, AIE can be shown to be one of the most valuable investments in your portfolio of decisions. And the cost of AIE averages 1% or less of investments that it is used to assess. In short, the best way to spend 1% of a budget is to figure out how to spend the other 99% in an economically rational way. Contact us to find out how AIE can solve your management dilemmas.