Information: Its Measurement and Valuation

Abstract

The current revolution, exemplified by the increased use of computers and robots in our society, gives a clear indication of the important role that information plays in any social organization. In the past few decades, much progress has been made refining the conceptual tools that can be used in the investigation of information-related issues. However, the analysis of the role of information remains a complex endeavor. For example, it may even be difficult to develop a consensus among scientists on the proper definition of information. For the purpose of this paper, the following taxonomy will be adopted. Data are defined to be the result of an inquiry process (e.g., sampling or experimentation) concerning particular events (e.g., today's hog price in Omaha, corn yield response to fertilizer in Iowa). By using codes (e.g., written or spoken language), the data can be transmitted as signals over space or time through particular communication devices (e.g., radio, telephone, newspapers). These signals generate messages that can be interpreted and used in decision making. For the statistician, the decision may be either to accept or reject a particular hypothesis. Alternatively, for the economist, the decision could be to select and implement a particular production, consumption, or investment action. In either case, information will be defined here as the screening, editing, and evaluation of data in the context of a particular decision-making process (Caspari). Any of the functions involving information (data coding, processing, and transmission of signals, decision) could be done by men or by machines. The allocation of the tasks between men and machines depends on their relative abilities.' For example, humans are very poor transmission channels: compared to computers, they read or write at a very slow speed and they forget a lot. However, the human language is a very efficient and economical code, and the computer is certainly much less complex than the human brain. In general, machines (computers, robots) often appear to have an advantage over humans when performing simple and repetitive tasks. This, coupled with the development of better and cheaper computers, seems to be the source of the current revolution which promises to alter significantly business decision making. In this context, it seems important for economists to sharpen the conceptual tools that can be used in the analysis of the role and value of information in management or policy decisions. The objective of this paper is to discuss briefly the measurement and economic valuation of information. Alternative information concepts found in the literature are reviewed. It is argued that the valuation of information is best analyzed in the context of decision making under uncertainty. A simple model is developed to illustrate how better information tends to improve the decision-making process. Implications of the model for the valuation of information are presented.